Index funds are a specific type of mutual fund designed to mimic the performance of a market index. It requires little to no management and might act as the foundation of a diversified portfolio with good returns. This is due to the fact that index funds do not aim to beat the market by generating higher returns. These allows the investors to replicate the market by purchasing shares in every company included in an index. Since market fluctuations are generally less volatile across an index compared to individual stocks, index funds can help investors effectively manage their portfolio risk.
Benefits of Index Funds
How Index Fund works?
- Indexing is a type of passive fund management. Instead of actively stock selection and market timing, a fund portfolio manager develops a portfolio whose holdings reflect the securities of a specific index. The concept is that by imitating the profile of the index—the stock market as a whole, or a broad section of it—the fund would match its performance as well.
- Almost every financial market has an index and an index fund. In the United States, the most popular index funds track the S&P 500. However, several other indexes are extensively used as well.
Features of Index Funds
Index fund returns
Index funds imitate the market index. Like index funds, they don't strive to beat the benchmark. Due to tracking issues, returns may not always match the index. The fewer errors, the better the index fund.
Since index funds track a market index, they have less equity-linked risk and volatility. Investing in index funds is a smart move during a market rally. Index funds lose value during market downturns, so things may get ugly. Always blend actively and passively managed index funds in your portfolio.
Index fund redemptions generate gains. Investment period affects tax rate. STCG are taxed at 15% (with 4% Health & Education cess). LTCG from funds held for more than a year are taxed at 10% (with 4% Health & education cess) if they exceed 1,00,000 in a year.
Index funds have a zero expense ratio, whereas actively managed funds have 1. Because index fund managers don't need an investment strategy. A fund with a lower expense ratio can nonetheless generate higher returns on investment.
Index funds can have big swings. If these changes remain long, your investment gains may be erased. So, index funds are best for long-term investors. If you invest in index funds, you must be patient to let the fund grow.
Types of Index Funds
There are a variety of index funds. Here is what you need to know:
A broad market index fund tries to capture a broad range of the market. Large market index funds often have the lowest expense ratios. Asset sales in broad index funds are extremely low and tax-efficient. A broad market index fund is appropriate for investors who desire a basket of various stocks or bonds.
International index funds: Global index funds give you global exposure. As an investor, you can buy funds that track indexes that are not tied to a specific geographic region in developing or frontier countries.
Long-term investors can profit from increased exposure to a diverse portfolio of small and medium-sized businesses. Based on market capitalization, index funds can attain this goal.
Bond index funds can help you maintain a healthy mix of short, intermediate, and long-term bond maturities that generate consistent revenue.
Index funds can also be based on a company’s profits or earnings. Companies are linked to two sorts of indices: growth indexes and value indexes. Growth indices are composed of companies that are predicted to make profits faster than the rest of the market. Value indexes are made up of stocks that are trading at a lower price than their earnings.
Difference between Index funds and ETF (exchange Traded Funds)
|Demat Account & Share Trading Account||Investors should have demat or share trading account to invest in ETF.||Investors don’t need a demat or share trading account to invest in index funds.|
|Net Asset Values||ETF are like stocks where the price changes on a continuous real time basis.||Net asset value of index funds are priced at the end of the day like any other mutual fund schemes.|
|Cost||ETF cost less due to a low expense ratio.||Index funds cost more due to the high expense ratio.|
|SIP (Systematic Investment Plan)||You cannot invest in ETF through SIP.||You can invest in Index funds through SIP.|
How you can Apply for Index Funds through Swaraj Finpro
As index funds are a class of equity funds, they are essentially taxed like any other equity fund plan. The dividends offered by an index fund is added to your overall income and taxed at your income tax slab rate.
Individual companies both outperform and underperform the market, but, in general, the overall stock market increases in value over time. As a result, index funds yield generally high returns for low cost, which make them an excellent value for any investor.
Index funds are investment funds that follow a benchmark index, when you put money in an index fund, that cash is then used to invest in all the companies that make up the particular index, which gives you a more diverse portfolio than if you were buying individual stocks.
Most experts agree that index funds are very good investments for long-term investors.