Index Funds are Mutual Funds or Exchange-Traded Funds. They construct their portfolios to match or track the composition of an underlying benchmark index, like the BSE Sensex and the Nifty50. These funds offer broad market exposure to the investor. They are also relatively easier to monitor since they mimic the selected index’s stocks and have the same proportion. There are other benefits of Index Funds.
For instance, broad market exposure helps the investor mitigate risks. While this is just one perk, the following are the others:
- Cost-effective
The expense ratio of Index Funds is lower than Active Funds. This is because they simply track a market index. They also do not require the same level of research and analysis as Active Funds, which can shoot up the costs.
- Diversification
Index Funds provide investors with a diverse portfolio of securities. This can help them gain exposure to a range of companies, sectors, and industries, and yield significant returns. This also saves them from the hassle of picking individual stocks.
- Consistency
These funds have a consistent investment strategy and objective. Both combined provide a sense of predictability to investors. Since Index Funds are not subjected to the same level of market speculation as Active Funds, they can minimise volatility. This way, investors dodge heavy losses.
- Types
Different types of Index Funds are available to investors. For instance, investors who want to invest in the Indian stock market but have time constraints may opt for BSE Sensex Index Funds. These provide exposure to the top companies in the Indian market. The index includes 30 of the largest publicly traded companies in India.
- Flexibility in investment style
Investors have two investing options at their disposal: Systematic Investment Plans and Lumpsum Investments. In SIPs, they can invest small sums regularly for a fixed period. However, under Lumpsum, they invest a sizeable chunk at once.
- Simplistic approach
You need not assess records, inspect the fund manager’s investment style, or worry about tracking performances to invest in the top Index Funds in India. If you wish to study a particular fund’s performance, you can simply select an index and invest in a low-cost Index Fund tracking the same.
- Tax efficiency
These funds have lower turnover than Active Funds. This makes them more tax efficient. As they do not entail frequent buying and selling of securities, they help investors minimise capital gains taxes.
- Less uncertainty
Such funds track indices, which are constructed based on market capitalisation. This discards the uncertainty of performance and helps the investor stay on track.
- Accessibility
Index Funds are easily accessible and can be purchased through most brokerage firms. This makes it simple for investors to add them to their portfolios.
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