This article will deal about index funds, their advantages and the risks involved.
It would be helpful if you know the below terms before getting into index funds.
Stocks / Equity / Shares - You will often hear these terms when you get into stock market. All the three terms mean the same (i.e) a piece of business / share of the company. Suppose if I ask you do you have TCS stock in your portfolio?, it means do you have the shares of TCS or not.
Portfolio - Portfolio is nothing but a collection of stocks and other instruments which you own like mutual funds, gold, crypto, etc
BSE - BSE is Bombay Stock Exchange. BSE is like amazon or flipkart where there will be sellers and buyers. Instead of selling common goods like smartphones, groceries etc, in BSE shares / stocks of the various companies are sold. It is just a platform to exhange the shares of the companies.
NSE - NSE is National Stock Exchange. NSE is similar to BSE. Just for an analogy we can assume if BSE is flipkart, NSE is amazon. Both will be selling the shares of various companies. Same companies can be bought from both BSE and NSE similar to buying a product from flipkart or amazon by comparing their prices.
Nifty50 - Everything must have a benchmark to measure the performance. So in-order to measure the performance of stocks listed in NSE, NSE has its own index known as Nifty50. Nifty50 index comprises of top 50 companies/stocks from various sector like IT, healthcare, banks, infrastructure, automobile, pharma etc. To know how nifty50 is calculated. read in their website.
Sensex - Sensex is also an index used for measuring the performance of BSE. Sensex is similar to Nifty50 instead of 50 stocks in NSE, Sensex derives its index based on the top 30 stocks listed in BSE. Sensex calculation.
To know the list of other indices in india other than nifty50 and sensex click here
Now, we know some common terminologies related to index funds. Let’s dive into the topic.
Index Funds
As I have mentioned in my previous article, Index fund is nothing but a mutual fund. In a typical mutual fund, there will be a fund manager and he will select the stocks on behalf of us. Index fund also has a fund manager but his role is just to replicate the stocks in the index(nifty50, sensex, nifty next50 etc).
Since the role of fund manager has become easy, the expense ratio of index funds are very low compared to actively managed funds. Since index needs very less maintenance or re-balancing of portfolio it is also known as passive funds.
Advantages of Index funds
Low expense ratio / low maintenance fee
Easy to track how the fund is performing
Less stress since the index consists of top companies which are stable
They replicate the index.
Risks involved
Risks in index funds are directly proportional to the replicated index (sensex, nifty50, etc). So if the stock market is going down or crashing then the Index funds will also take hit.
Index funds are equity funds. When it comes to equity funds you should at least stay invested for a longer period of time. Index funds will face a lot of fluctuations in the short term but if you stay invested for a longer period you will be rewarded.
Who can invest in index funds?
Anyone can invest in index funds but if you are person who don’t know how to pick stocks or if you are not sure how to analyse a mutual fund then just choose a sensex or nifty50 based index fund and start a SIP. Compare the expense ratio and tracking error of the selected funds with the other funds before starting an SIP. (Maybe I will write another article how I filtered out the fund in which I am investing in)
How do I invest in index funds?
I personally use Kuvera to invest in index funds. Other apps that are available in the market are Zerodha coin, ET money, groww, 5paisa, paytm money etc.
I invest in UTI Nifty50 index fund but don’t consider this as a recommendation. Please do your own research and start investing. If you are planning to invest in index funds, I would recommend you to do an SIP for atleast a 10 -15 year horizon.
Fun Facts
86% of the large cap mutual funds failed to beat their respective index. To read more, click here.
If you want to buy the shares of BSE, you can only buy it in NSE since it is only listed / available in NSE.
Note: To be honest there are lot of terms related to investing and I am planning to cover those terminologies as much as possible in one of my upcoming posts. So that it will be easier to understand the concepts. Until then stay tuned.
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