What is an Index Mutual Fund?
Index Mutual Fund is a type of Mutual Fund that helps track a market index’s returns. These funds are also termed index-tied or index-tracked Mutual Funds. Index Mutual Funds have not managed funds, and hence they incur low expenses. Index Mutual Funds do not aim to outperform the market; they usually keep track. Index Mutual Funds help individuals manage and balance the risk involved in their investments.
How Do Index Mutual Funds Work?
An Index Mutual Fund is a group of securities that define a particular market segment. These securities can be either bond market instruments or equity-oriented instruments.
Some of the popular indices are BSE Sensex and NSE Nifty. Since the Index Mutual Fund tracks a particular index, it falls under passive fund management. Later, the fund manager decides which stocks are to be bought and which are to be sold.
Benefits of Index Mutual Funds
Index Mutual Fund enables broad diversification, has low cost, and provides attractive returns.
- Broad Diversification
One of the best benefits of investing in an Index Mutual Fund is that your portfolio becomes diversified. Diversification ensures that the value of your portfolio is not correlated with the fortunes of any one company listed in the index.
- Low Costs
Another benefit of investing in an Index Mutual Fund is that the cost, taxes, and management fees may be lower than those associated with other investments.
Who Should Invest in Index Mutual Funds?
The decision in investing depends on your risk tolerance and investment goals. Index Mutual Funds are preferable to risk-averse and expect predictable returns. These funds do not need substantial tracking. For example, if you want to invest in equities but are unwilling to risk, you can choose BSE Sensex or Nifty Index Fund. These types of funds will give you returns that match the particular index. Though you want to earn market returns, you can opt for actively managed mutual funds.
How to Invest in Index Mutual Funds?
It is now easier to invest in Index Mutual Funds without paperwork and documentation. Axis Mutual Fund App is an official Mobile App of Axis Mutual Fund. This app is a fast, simple, and paperless investment.
Axis Mutual Fund App helps investors to invest anytime and anywhere. The app offers several investment categories like Debt funds, Small Cap funds, Index Mutual Funds, Large Caps Fund, and many more. Axis Mutual Fund App has no Re-registration. Any online investor of Axis Mutual Fund can use the app.
What are the Costs Associated With Index Mutual Funds?
As Index Mutual Funds generally use passive investing techniques, they can save costs. For example, managers of index funds are not actively picking securities, and hence they do not need the services of research analysts that help pick securities. This reduction of cost could lower the overall cost to shareholders. However, not all Index Mutual Funds have lower costs than actively managed funds.
Things to Consider as an Investor While Investing in Index Mutual Funds
Investing in an Index Mutual Fund is a good option if you are looking for higher returns. However, you’ll still need to switch to actively managed funds during a market slump. Index Mutual Funds tend to lose their value during a market recession. And hence it is advised to have a mixture of actively managed funds and Index Mutual Funds in your portfolio.
Cost of Investment
The expense ratio of Index Mutual Fund is usually lower than actively managed funds. The portfolio of Index Mutual Funds is passively managed, and hence the fund manager need not be required to formulate any investment strategies.
Index Mutual Funds track the performance of underlying benchmarks passively. The funds do not aim to beat the benchmark but to recreate the index’s performance. However, the returns generated may not be at the level with the index due to tracking errors. Hence it is advisable to shortlist the funds with minimum tracking error before investing in Index Mutual Funds.
The Risk Involved in Index Mutual Funds
Unlike any other investment, Index Mutual Fund does involve risk. The fund is also subjected to other risk factors like
An Index Mutual Fund may not track its index perfectly. Investors should go for Index Mutual Funds with low tracking errors.
Lack of Flexibility
An Index Mutual Fund has less flexibility than a non-index mutual fund.
An Index Mutual Fund may underperform its index because of its expenses and fees, trading cost, and tracking errors.
Investing in Index Mutual Fund has always been considered one of the wisest investment decisions you can make. Index Mutual Funds are smart tools for diversification. They are also affordable and tend to generate higher returns over time.