Jack Bogle started the First Index Investment Trust on December 31, 1975. Later it also came to be known as Exchange-Traded Funds (ETFs)
But, before we dive in the, how to get started with investing and What an ideal portfolio looks likes? Let’s get you started with the basics.
What are Index Funds?
Index Funds are your standard mutual funds, but your portfolio or stocks are curated to mimic the performance of an Index (Nifty50, Sensex, S&P 500, etc.). “Indexing” is a passive form of fund management.
Portfolios here are structured to perform similar to the market it is replicating. This being said, your Index funds are not designed to outperform the market, instead perform identically to it. So, a strategic selling point of Index funds/ Passive Mutual Funds is that there is no requirement of a portfolio manager as the need for active investing and strategy- i.e., buying and selling is absent.
What are the advantages?
- Low Expense Ratio
Lower management Expense ratio is the sum, which includes all of the operating expenses such as the payment to advisors, transaction and accounting fees, and other taxes.
- Ideal for passive, buy-and-hold investors
Index Funds are made for long term investors, who are willing to park their capital for a longer duration (1-3 years).
- Portfolio Diversification
The golden rule of stock market investment, never put away all your money on a stock of a similar industry. Index Funds allows the leeway of choosing stocks spanning across the various sector, thus reducing the risk factor and also bringing in a variety of stocks under one roof. Index Funds require you to bring in high-quality stocks in your portfolio for maximum returns.
- Demat account
Since Index Funds are not listed on stock exchanges, investors are not required to be a holder of an active demat account (A demat account holds financial securities in electronic form, i.e., contains all the information about your transactions- buying and selling of stocks)
How to Invest in an Index Fund in India?
The best way via which an individual can invest is through an index mutual fund. Have your portfolio manager create a portfolio that accurately replicates an Index (Nifty50, Sensex, S&P 500, etc.)
Top 3 Important steps to take as a beginner while investing in Index Funds:
Where to buy from? Things to consider before purchasing funds.
You can buy an index fund directly from mutual fund companies or brokers.
- Big mutual fund companies carry some high performing lineups, but brokers sometimes provide discounts.
- The most convenient way is to find a single service provider who can accommodate all your needs (Mix funds, pure funds, etc.).
- Always check for any hidden or upfront charges like trading costs and commission fees.
Pick your Index
Now that you are all set with your company to sit down and do some research, the market’s sentiment, which Index is doing good.
There is an array of options to choose from like,
- Small, mid or large-cap indexes
- The industry in which the funds focus on (Consumer goods, technology, health for example)
- Assets covered by the funds- Domestic or foreign bonds, cash, commodities.
Investment costs (Taxes etc. if any)
The major selling point of Index funds is the low costs. They are cheap as they are programmed to follow the shift in the value of the market. However, there are a lot of companies that unload various charges onto the investors. Two funds may be tracking on a similar Index (say Nifty 50) but may differ in the administrative fees. These small percentages of costs may hurt your accumulated wealth in the case of long-term investments.
- Referred from Index Funds: How to Invest and Best Funds to Choose, by DayanaYochim on 01 May 2020 nerdwallet.com
- Referred from Index Fund, by James Chan, Updated on 22 Feb 2020, investopedia.com