What is Index Fund: Talking about equity investment, there is usually price volatility. There is a need to invest in better options after analytical analysis, as well as it is important to track it periodically after investment. It can be said that the risk in the equity market is high. But not every investor likes taking risks, so index funds can overcome the problem of investors. Index funds are considered to be a risk-free and low-cast investment. Here, there are no problems with high risk and effort. Here investors can easily invest equity at low cost. Let’s see how….
What are index and index funds?
Index: An index is the weighted average composite score that tracks the performance of the stock market. This calculation is done using the stock price of select stocks which are somehow representative of the market. The BSE Sensex and NSE Nifty are examples of this.
Index Fund: An index mutual fund or ‘index fund’ is a division of mutual funds, called passive funds. These funds invest in the same securities as the index they track. And thus they have passively managed funds. Since the fund manager only follows the asset allocation of the underlying index, there is no investment strategy by the fund. The only condition is that at least 95 per cent of the investment should be insecurities.
Feature of index fund
Unlike actively managed funds or actively managed funds, index funds are moderate risk investments. Actively managed funds follow a better-than-market strategy so that they take more risk. This also includes high-risk investments in your portfolio. In contrast, the returns of an index fund are linked to the underlying index that is being tracked.
Another feature of an index fund is that it has a lower expense ratio. That means the cost of your Nivea is low. In this way they are less expensive options than actively managed funds. According to Sebi’s Mutual Fund Rules Regulation, the expense ratio for index funds cannot exceed 1 per cent of the daily net asset.
Index funds are not traded on the exchange, therefore, the index funds have lower liquidity than regular funds. However, they are open-ended schemes, which means that you can always sell your mutual fund units back to mutual funds and redeem your money at any time.
Who should invest in index funds
Index funds are best suited for investors who want a higher-than-normal return over the long-term by investing in equities but do not want to take too much risk. However, this does not mean that index funds have no risk. If the market goes down, your index fund NAV will also go down. In such a situation, before the market starts falling, you can redeem your index fund investment and shift the money to Ute Fund, Gold or Term Deposit.
What to keep in mind
While investing in an index fund, you should see what is the tracking error, which is the difference between the return and market returns of the index fund. It should be shorter. Additionally, choose index funds that have an expense ratio of less than 1 percent. Index funds are a better option when you want low-cost investment options. With the recovery in the economy in the coming days, the returns of these funds will also increase.
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