An index fund is an investment in the market index. It is a fund that mirrors the performance of the market index. Index funds can track the changes in the prices of thousands of stocks, so they help in creating a diversified portfolio. In addition, index funds have low fees, which can also increase the returns of an investor.
As with any other market-linked investment, an index fund can also be risky. These funds follow both the ups and downs of the benchmark index.
What is an Index fund?
Index funds hold the group of bonds, stocks, and other assets. It is directly related to the market index. It is one of the most preferred investments because it is simple and offers diversification benefits. As they are simple, they have lower fees than traditional investments. In India, only funds benchmarked to BSE Sensex and Nifty are considered. As Sensex and Nifty Index funds include no research and management costs, the expense ratio of the same is low. In addition, look for the funds with low tracking errors.
Why are Index funds not popular in India?
Many mutual funds available today offer 10-15% annualized returns, but the returns of Index funds range from 4-8%. Mutual funds invest in the best-performing companies and stocks so the returns are higher than that of index funds. This is the reason why index funds are not so popular in India.
Ways to invest in the best Index funds:
Index investing may seem intimidating, but it is an easy process. The following documentation is required for the same:
- Identity proof
- Passport size photo
- PAN card
- KYC documents
- Canceled cheque
You can start investing in Index funds through SIP mode or lump-sum investment. SIP mode is suitable for investors who don't have cash handy and like to invest for the long term. Lump-sum investment is suitable for investors who have enough cash available and who can manage the risk associated with the same.
There are two ways to invest in Index funds:
- Direct investment – Investors who want to invest in the index funds directly can visit the nearest AMC branch. You need to submit the documents mentioned above and fill out the application form and make the payment.
- Online mode – If you want to invest in index funds from the convenience of the home, you can do it online. Select and download the third-party app offering investment in a mutual fund. From there, select go to the passive index fund section and choose to invest in it. After selecting your preference, click on the investment option and choose between the SIP or Lump sum. Enter the amount and proceed to make the payment. Enter your PAN number and complete the KYC.
Investing in an index fund is easy, but you need to be careful while formulating your investment strategy and picking the index fund.