Have you heard about Index funds but do not know what they are or why you should invest in one?

As per research done by Morningstar India, the Asset under Management (AUM) of index Funds in India in February 2022 has grown by 590% since February 2020. This shows the immense popularity of Index funds in our country.

So, the question is should you invest in one too? Here we will tell you what Index Funds are and why you should invest in them.

What Is An Index Fund?

An index fund is a type of mutual fund that tracks the performance of a specific stock or debt index. So, when you invest in an index fund, you are essentially investing in all of the stocks/bonds that make up the index.

This type of mutual fund offers investors the opportunity to gain exposure to a broad range of stocks and bonds, without having to worry about individual stock picks or bond holdings. They are also typically less expensive than traditional mutual funds, and they often provide better overall returns than traditional mutual funds over time.

In India, the two most popular broad market indices on which Index Funds are available are the Nifty50 index of the National Stock Exchange (NSE) and the Sensex of BSE.

Since an index fund tracks a specific index, its performance will be very similar to the returns that its benchmark index generates. In other words, the percentage returns you will get by investing in an index fund will be somewhere around the returns that the benchmark index will show in a certain year.

Read also: Frequently Asked Questions About Index Long Term Strategy

Reasons To Invest In Index Funds:

1. Index Funds Are Easy To Understand

If you want to invest in the stock market, you will have to decide if you want to take a risk on growth stocks or invest in a safer, lower-risk investment such as an index fund.

An index fund allows you to gain access to the same returns as the market without needing to understand the nuances of investing. So, index funds are a smart choice for beginners who want to get started in investing.

2. Index Funds Offer Diversification:

Index funds offer instant diversification across many securities

Diversification is something that every investor should consider. It simply means that instead of putting all your money in a few investments, you spread it among as many different investments as possible. This will give you better returns and at the same time reduces the risk of losing your entire investment.

Investing in index funds offers a compelling and simple way to diversify your portfolio since it invests in the entire basket of stocks the index is made of. For example, a Nifty50 index is made up of 50 different companies that are included in the Nifty50 index. Similarly, an Index Fund based on Sensex holds all 30 stocks that the BSE Sensex is made of.

3. You Do Not Have To Track Every Stock Individually

When you invest in an index fund, you are essentially investing in all of the stocks that make up the index. Therefore, you do not need to worry about how well each individual stock is performing or whether their fundamentals are good or not.

Index funds offer a great way to diversify your investments across multiple sectors or companies without having to worry about the individual company’s performance. For this reason, if you are looking to get started investing in the stock market, I recommend starting with index funds.

4. Index Funds Are Cheaper:

Index funds are a great way to invest your money because they have low expense ratios. This means that you will only pay a small percentage of the total value of your investment for the management of your account. This makes index funds a very affordable way to invest your money.

When you compare index funds to actively managed funds, index funds are cheaper. This is because of the passive way in which Index Funds are managed. While in an actively managed fund the fund manager keeps buying and selling stocks to outperform the market, in an index fund the manager simply replicates the index.

5. You Can Invest In All Sectors Of The Stock Market:

A broad market index like Nifty50 or BSE Sensex is made of stocks from all the sectors of the Indian economy. Hence, investing in an index fund based on them is a good way to invest in all the sectors of the stock market. This gives you a better opportunity for getting stable returns.

6. Low Minimum Investment Requirements:

You can start investing in an index fund with a very small amount. While most fund houses require a one-time investment of Rs 1000 in index Funds, you can start a SIP with as low as Rs 200 per month.

7. Liquidity

Index funds can be sold quickly and at low costs Index funds offer simplicity, diversification, and liquidity. Investors can buy an index fund easily via a mutual fund or exchange-traded fund (ETF).

Read Also: How To Build A Rs 100 Crore Portfolio In 20 Years

Conclusion

These were some of the compelling reasons why you should invest in an index fund. For me, the biggest ones are the low fees and investment requirements, liquidity, and the diversification opportunity they provide. These features make them a good option for beginning investors. If you are looking for a way to invest your money, you can seriously consider investing in an index fund.

Happy Investing!

This article is for education purpose only. Kindly consult with your financial advisor before doing any kind of investment.