Hello to all the readers!
This post is all about understanding Index funds and whether to invest in index funds or not. And who all should actually considering such investment option.
What is an Index in Stock Market?
An index is a list of companies. Sensex is the index of top 30 companies of India. And there is another popular index i.e. Nifty 50 which is the index of top 50 companies of India. S&P 100 is the index of top 100 companies of USA.
What is Index Fund in Stock Market?
Index fund is a kind of Mutual fund that invests the funds in Index like Sensex, Nifty 50 and others. Index funds are invested in same weightage like actual index. For example if 2 stocks are in weightage of 50% and 50% then Index fund also invests the money in the same weightage.
The fund manager in Mutual fund pools money from investors and similarly fund manager in Index fund pools money from the investors.
Mutual fund is active form of investment. The fund manager is actively buying and selling stocks. He does so based on company’s or sector performance. He also keeps on re-balancing stock portfolio. And thereby for all such efforts and time, charges are 1% – 1.5% or sometimes to 2%.
Index fund is passive form of investment. The fund manager is re-balancing only quarterly and that too depends if need be. The companies are same as the actual index. And thereby charges are very low 0.1% – 0.3%.
There is an important thing to consider about which index fund to select. The actual returns reflected by Sensex/Nifty50 and reflected by respective index fund has a slight difference. And the tracking error monitors if this tracking difference is changing over a period of time. So a good index fund is that where the tracking error is constant over the period of time.
Who should invest in Index Fund?
The index fund investment is for people who has no time to learn and track the stock market. So better than the mutual fund and for long term investment, index fund is a good option to go with.