Index funds: 4 Reasons Why it is considered Best as investment.

INDEX FUNDS: An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match the components of a financial market index, such as Sensex, Nifty 50, Nifty next 50, Bank Nifty etc. It is considered as passive form of investing as here Fund managers just have to copy the Index. It is considered as Best investment for long term investor.  Warren Buffet says about Index fund- “In my view, for most people, the best thing is to do is invest in Index fund.”

4 reasons it is considered as best investment for long term investors-

  1. Low charges: As Index fund is copy of any one the indices, so no research is required to pick the stocks hence this funds have least Expense ratio. If invested for long term the benefit of less expense ratio become a huge amount, sometimes in crores, for investors.
  2. Beat the Active Mutual funds in Long Term: Historically it is observed that Index funds give higher returns in Long term (like more than 10 years) than most of the Active funds managed by expert professional. This is makes Index funds unique in itself.
  3. Balanced and safe: The risk of going down of portfolio is almost NIL in long run. We can see sensex/nifty always increased in past and keep increasing in future as well in long run. Due to this index funds have a good safety.
  4. Less risk Good rewards: Since it is safe and usually beat the returns of Active funds it has very good risk to reward ratio.

Ways to invest in Index funds

  1. Index Mutual funds: Anyone can invest in Index funds just like Mutual funds from any Mutual fund investing platform.
  2. Index ETF: To invest in Index ETFs you need have Dmat account and a broker. You can Buy/Sell it just like any another Stock.

Factors to consider while picking Index funds:

  1. Expense ratio: This factor is to consider when you investing in Index funds through Mutual funds. Ideally Expense ratio should be less than 0.5%, if any Mutual fund has more than this you should avoid investing in it. If you also want to save this expense ratio you can go for Index ETFs.
  2. Tracking difference: This is difference in Actual Index mutual funds return and Index return. Index return is always slightly higher that Actual Index mutual funds return. It should be less and consistent.
  3. Liquidity: This is for Index ETFs, sometimes when market is very volatile you may not find any buyer or seller for your ETFs. For example in some day market goes up around 5%, at that you may not find any seller as everyone is buying at that time hence you will not be able to trade. In opposite, when market goes down significantly and you can’t find any buyer so can’t sell at that time. These cases are rare but in order to avoid this you go Index Mutual funds.

Bottom-line is that if you are a long term investor and want to play safe with a good growth in your capital just go for Index funds.

Happy Investing.

Kapil Khatri

I write about Finance, Economic and Social issues. I also write on topics which have public importance.

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