What is an index fund and whether you should invest in one?



What is an index fund and whether you should invest in one?

A stock index represents a certain section of the stock market indices. It contains a few selected stocks which help the financial analysts and managers to describe the market and compare the returns of specific investments. Index fund managers do not try to beat the market but try to replicate the market. A major benefit of index funds is that they are passively managed and not actively managed. This makes the expense ratio of index funds much lower than actively managed funds.

Below is a 7-day chart for the closing price of the Sensex:




The top 30 well established and financially sound firms are represented by the SENSEX and it shows the relative prices of the shares of these 30 companies on the Bombay stock exchange. On the other hand, NIFTY represents the relative price of shares of the top 50 well established and financially sound firms. 

Listed are some of the best index funds in India:
  • Reliance Index Fund - Sensex Plan growth
  • LIC MF Index Fund Sensex growth
  • ICICI Prudential Nifty Index Fund growth
  • UTI Nifty Index Fund growth
  • Franklin India Index Fund Nifty Plan growth
  • SBI Nifty Index Fund growth
  • IDBI Nifty Index Fund growth

Whether to invest in index funds?

If you see the index funds, you will notice that the returns are substantially more than a savings deposit or even a fixed deposit. Investment in index funds is quite safe as it is invested in some of the best financially stable firms. The investment in index funds lowers the overall portfolio risk for an investor due to different firms being part of the index fund.

The Compound annual growth rate for Sensex from 2013 to 2018 is close to 10.86%. The CAGR for Nifty for the same period is close to 10.11%. Both the indexes have given significantly more return than the usual bonds and bank FDs.Therefore, it is completely advisable that if an investor has a long term horizon then he should opt to invest in Index funds because of their good returns and lower expense ratio.

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Please comment on any financial query you had like me to address. I will try to post something worthwhile. 

Coming up Next: What is passive income and what are a few ways to increase passive income?

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