Introduction
Mutual Funds have never ceased to attract investors. They are diversified, dynamic investment products that deliver good returns. A common technique to gauge your fund’s performance is by comparing it with market indices like Sensex and Nifty. Some funds provide better than the market average, while some are not as good, and some returns are exactly aligned with market indices. You have Mutual Fund solutions for pretty much every investment concern. If you are an investor looking for a well-diversified fund that behaves like the market index, an Index Mutual Fund is your solution.
What is an Index Fund?
Index Funds are a type of mutual fund that has the same portfolio structure as their underlying index. This is both in terms of the stocks they hold and the weightage of those stocks in the portfolio. This means, if you invest in an Index Fund, you will find a presence of the index stocks in your fund’s investment portfolio.
Key Features of Index Fund
- It replicates the portfolio of the underlying index in terms of the stocks that it includes.
- It is a complete replication despite the weightage it gives to each stock in the portfolio. Hence, it is said to be a passively managed fund.
- Consequently, the expense ratio that includes the fund’s management fees and other cost components is meagre in Index Funds – usually 0.2 to 0.5%.
- The objective of these funds is to perform exactly like the index – neither underperform nor over-perform.
- These funds’ portfolio consists of highly reputed large-cap stocks that are actively traded and offer steady and stable returns.
- These funds offer diversification by exposing you to several sectors and a wide range of stocks. They act as a great tool to even out the risks of your overall portfolio.
Types of Index Funds
Nifty 50 Index Fund
A Nifty 50 Index Fund will replicate Nifty exactly with a portfolio of the largest 50 companies (as per market capitalization) listed on NSE.
Sensex Index Fund
A Sensex Index Fund similarly replicates the Sensex Index and includes the 30 largest listed companies on BSE, along with their weightage structure.
Drawbacks of Investing in an Index Fund
Like most investment tools, Index Funds have a flip side too. Here are the key ones,
Low performance
If you invest in an Index Fund, you may feel your fund is underperforming compared to the other equity-based Mutual Fund schemes. This is because the other Mutual Fund schemes are actively managed by their Fund Managers, who constantly try to seize market opportunities to grow the corpus and outperform the market average.
Less-growth
Index funds invest in the top stocks as per market capitalization. Hence, their investments lie in large caps and not in mid-cap or small-cap funds. This leads to missing out on the vast potential of growth that mid-caps and small-caps offer.
Is an Index Fund a good pick for you?
Each Mutual Fund is created to achieve a particular objective. Some funds are created per market capitalizations, some are sectoral funds, and some are growth-driven, while some aim to provide a regular income. You should pick a fund as per your end financial objectives.
For this, define your goals first – Are you looking for a large corpus after a certain period, or do you need a steady income flow throughout your investment tenure? How much risk can you afford? For how long can you stay invested in this Mutual Fund?
If your answers to these questions are on the lines of – low risk, market-equivalent steady growth, and medium-term investment horizon – then Index Mutual Funds will be apt for your portfolio. Index Funds are for you if you want equities to be a part of your portfolio passively and you’re not willing to take big risks. If you have more time to stay invested, say 5-7 years or more, you could also consider actively managed funds. They tend to outperform market indices in the long run. However, actively managed funds do come with a set of market risks. Hence, accordingly, pick your ideal fund.
Conclusion
The journey into any Mutual Fund or any financial investment, for that matter, is through a Demat account. So, if you want to start investing in an Index Mutual Fund, you should first sign up for a Demat account (if you do not have one). Remember, only a registered broker can open a Demat account for you. Selecting a registered broker like ICICI Direct comes with multiple benefits – a reputed brand, great quality service, and affordable rates.
Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400 025, India, Tel No : 022 – 6807 7100. AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.