Index Funds
Invest in the securities of a particular index like Sensex and generate returns similar to the benchmark index with reduced risks.
- Average returns - Dynamic
- Number of funds - (Static)
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What are
index mutual funds?
An index mutual fund is one wherein the portfolio mirrors the asset allocation of the benchmark index. The scheme is passively managed and aims to match the index returns.
Advantages of index mutual funds
No investment bias
Since the portfolio imitates the benchmark index, fund managers don’t pick the securities. Thus, there’s no investment bias.
Low cost
Being passively managed, index funds have a very low Total Expense Ratio allowing you to get higher returns.
Diversified portfolio
You get to invest in a diversified portfolio of stocks and securities which help in mitigating investment risks while enhancing returns.
Types of Index Funds
Funds Based On Duration
Overnight Fund
Securities mature in a day
Liquid Fund
Maximum maturity of securities is 91 days
Ultra Short Duration Fund
Bonds matures between 3 and 6 months
Money-Market Fund
Investment in money market securities with an investment tenure up to 1 year
Short Duration Fund
Macaulay duration of the fund ranges from 1-3 years
Medium Duration Fund
Maturity of bonds in between 3-4 years
Medium to Long Duration Fund
Maturity of bonds ranges from 4-7 years
Dynamic Bond Fund
Portfolio invests in securities across durations
Funds Based On Market Capitalisation
Corporate Bond Fund
Portfolio invests primarily in corporate bonds
Credit Risk Fund
Investment in securities with the second highest credit rating
Banking and PSU Fund
Debt instruments issued by banks and PSUs
Gilt Fund
Investment in government securities
Understanding Index Funds
What are Index Funds?
Index funds are passively managed mutual funds wherein at least 95% of the portfolio is allocated matching the allocation of the benchmark index. The weight of each security also matches the weight in the benchmark index. The fund, thus, aims to mirror the returns of the index.
What are the features of index funds?
- Passively-managed mutual fund schemes.
- SIP or lump sum investment.
- Tracks a particular index.
- Diversified portfolio of securities.
- Lower expense ratio since active fund management is not involved .
How Index Fund works?
Index funds collect money from different investors and pool it in a corpus.
A benchmark index is identified and the corpus is allocated to the securities comprising the said index.
For instance, if the benchmark index is Nifty 50, the portfolio would allocate the corpus into 50 stocks which comprise Nifty 50.
The weightage of each security in the portfolio matches the weightage of the security in the chosen index.
For instance, if stock A has an allocation of 25% of the Nifty 50 index, it will have an allocation of 25% of the overall portfolio of the index fund.
The performance of the portfolio of the index fund matches the performance of the chosen index. There might be a tracking error, though.
Fund managers simply rebalance the portfolio to ensure that the weightage of each security matches that of the index.
What should you know before investing in index funds?
There is, usually, a tracking error when it comes to returns. The fund’s returns might be slightly lower than the index returns.
Tracking error happens because it is challenging to match the index at all times
If you choose equity-oriented funds, there will be volatility risk
Equity funds can deliver attractive returns on investments over long period of time
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