Back in the day, people used to say, “Do not put all your eggs in one basket.” Today, in the world of investing and wealth creation, that’s called diversification. Investors should diversify their portfolios between several asset classes, such as equity, debt, gold, and real estate. This diversification helps lower investment risks and maximise returns.
Index funds do exactly that for equity investments. They diversify your equity investments among the top stocks of whichever indices they follow (NSE Nifty or BSE Sensex) and offer comparable returns to its index. But why does this matter? Why should you invest in index funds? And even if you decide to go ahead, how to invest in index funds in India? Let’s answer all these questions here.
Index funds are a type of mutual fund. They allow investors to directly invest in the top companies of the market index they follow without buying individual stocks in each company. These funds are passively managed, which allows them to have a low expense ratio.
These funds mimic the returns of popular market indices like NIFTY or Sensex, which ensures some stability and security for equity investments.
To summarise, index funds can help you get comparable returns to popular market indices like NIFTY 50 or BSE 100 and offer many convenience and tax-saving opportunities to its investors.
Fund managers manage an index fund, much like other mutual funds. One of the differences, however, is that index funds are managed passively. This means the fund manager doesn't actively work to select the industries and stocks in which the fund invests. They shadow the index they are following and invest in all the index stocks in the same weightage as the index to build the fund's portfolio.
Example of an index fund
The ICICI Prudential Nifty 50 is an example of an index fund. To put into perspective and easily understand each of the things we’ve learned about index funds so far, let’s use this fund as an example.
1. The ICICI Prudential Nifty 50 Index Fund follows the Nifty 50 index. This means the fund's portfolio holds the stocks of Nifty 50 companies in the same weightage as the market index.
2. This fund is managed passively, as are all index funds, and it offers investors a low expense ratio of only 0.35%. The average expense ratio of index funds in India can range between 0.1% to 0.5%.
3. The minimum investment required in this index fund is just ₹100.
Index funds are ideal for investors who are new to equity investing. It allows investors to reduce the risk and active management required to invest in individual stocks while giving them access to a broader market. Even for seasoned investors, index funds reduce equity-linked risks and offer good to moderate returns on long-term investments.
To summarise, every investor, whether new to mutual funds or well-experienced in investing, should invest in index funds. It helps diversify their portfolio, reduce equity-linked risks, and earn moderate to good long-term returns.
When you are trying to learn how to invest in index funds India, there are two processes: online and offline. Let’s review the stepwise process of online and offline investing in index funds.
1. Step 1: Open an investment account directly with an AMC (Asset Management Company) or online investment platform.
2. Step 2: Fulfill the KYC requirements to complete the sign-up process.
3. Step 3: Choose the index fund or funds you want to invest in.
4. Step 4: Before investing, review important fund information such as exit load, expense ratio, average returns, and risk meter.
5. Step 5: Transfer the desired funds to your chosen index funds and complete the process.
6. Step 6: You can also set up a SIP (Systematic Investment Plan). This will automatically debit money from your chosen bank account and invest it in the index fund monthly.
1. Step 1: Locate the nearest AMC branch that offers investment to your desired index funds.
2. Step 2: Complete KYC formalities to get started investing.
3. Step 3: Transfer your desired amount to the mutual fund scheme.
4. Step 4: Receive the receipt of your investment from the AMC.
5. Step 5: Track your investment with periodic account statements shared with you.
6. Bonus Step: You can also set up SIPs offline. Express your interest in starting a SIP with your AMC, and they’ll guide you through the process.
All the best index funds to invest in the country allow you to invest both online and offline. So follow any of these processes to get started on your investment journey.
Now that you know how to invest in index funds, let’s review some of the top benefits these funds offer investors.
- Tax Efficiency
Index funds do not sell individual securities or rebalance their portfolio often. This improves the investors' after-tax returns.
- Low Fees
Index funds are passively managed, which results in lower fees and expense ratios. This gives investors lower deductions and exit loads on their returns compared to actively managed mutual funds.
Easily Manageable: An index fund's stock allocation is not subject to frequent changes. This makes index funds easily manageable for novice investors who may not understand portfolio rebalancing.
Even though index funds mimic the investments of a market index, they still may not be able to offer the same returns as the market index due to tracking errors. As these funds are managed passively, it is difficult for fund managers to always hold the same proportion of securities as the market index. In cases where index compositions change, these funds attract transaction charges to rebalance their portfolio, which can affect their returns.
Index funds offer investors an opportunity to diversify their investment portfolio and earn moderate to good long-term returns. They are less volatile than direct stock trading and actively managed mutual funds. Index funds also offer a balanced investment opportunity to investors, even at a low entry cost.
The recent reclassification of mutual funds by SEBI is expected to make index funds a popular investment opportunity among investors. So, now that you know how to invest in index funds, invest today to build long-term returns on your investments, diversify your portfolio, and reduce equity-linked risks.
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