In India we have two broad indices: Nifty and Sensex. Nifty is managed by National Stock Exchange and Sensex is managed by Bombay Stock Exchange. According to research, you can outperform 95% of the investors if you invest in an index fund. That means that it is very difficult to outperform the index.
What is an index fund?
Index funds are mutual funds that aim at mimicking the broader market index. You all know the benefits of diversifying your portfolio. When you invest in index fund you aim to maintain uniformity with Nifty or Sensex. You are not fighting to outperform it.
How index funds work?
Index funds are basket of stocks that have stocks in the same proportion as in Nifty. If Nifty goes up, your index fund will go up and if Nifty goes down your index fund will go down. It is as simple as that. Managing index funds are quite easy because you don’t need a research team that is working day and night to beat the index. You can make a basket of stocks in the same proportion as in Nifty and your work is done. These are passively managed funds.
Who can invest in index fund?
Different investors have different risk appetite. Some prefer high risk high reward stocks some prefer the opposite. Index fund is for people who don’t want much risk in the game. If you want predictable return with less risk, you can invest in index funds. However, if you want to beat the market, then you should go for actively managed funds.
Things to consider as an investor
1. Risk tolerance: You should first find out your risk appetite. If you are in your early years, you can definitely take more risk. However, if you are near your retirement you cannot afford to risk your hard earned money. If you want higher return you will have to take more risks, always remember that.
2. Return factor: Index funds have very predictable return. They would be able to give you 10% to 12% return annually. If you are happy with that you can invest in index fund. However, most investor are not able to beat the market in the long run. If you want a hassle free investment option, index fund is for you.
3. Cost of investment: Index funds have very less expense ratio, only 0.5%. You don’t need a dedicated team who would work hard to beat the market. Index funds are passively managed funds and this is the reason why they have very low cost of investment.
4. Investment horizon: Index fund is for people who want to invest money for a very long term, say 10 to 15 years. In the long term it is very difficult to beat the market.
To sum up
Whether you want to invest in index fund or select stocks yourself, you will need a Demat account. 5paisa is one of the best brokers in the industry. You can open your Demat account with 5paisa and avail exclusive benefits.