To have a smooth financial journey, it is important to start early. Apart from starting early, you also need to make sure that the portfolio created is well-diversified, and other than starting early, it is also very important to stay disciplined. One of the ways you could achieve things like a diversified portfolio is by opting for mutual funds. To maintain disciplined investing, you could opt for systematic investment plans or SIPs. But it is important to make note of one important fact mutual funds are not a monolith and several variants of mutual funds are available as an option. Read below to learn about what index funds are and why it is important to have them as a part of your investment portfolio.
One of the numerous types of mutual funds, index funds for being one of the prominent examples of an investment scheme that is passively managed. These funds are known for analyzing market index benchmarks like the NIFTY Next 50, NIFTY 50, and SENSEX and try to track to imitate their performance. For imitating the performance of an index that’s chosen, these funds are known for holding on to the shares that come with the chosen index. Also, you should make note of the fact that the said shares are purchased in the same proportion as the index the fund is replicating. As these funds are passively managed, after constructing a portfolio consisting of stocks, the fund manager makes sure to maintain the allocation of individual stocks in the same proportion as the replicated index. Moreover, unlike active investing, the fund managers using passive investment are note free to select the stocks they invest in. Instead of having the freedom to select stocks, fund managers are responsible for making sure that the fund is replicating the portfolio of the chosen index like the NIFTY Midcap 150. Provided below are some of the reasons why you should consider index funds as a viable investment option:
Reasons to consider index funds:
- They come with low fees:
As index funds mimic an underlying benchmark, they don’t need to have a team of research analysts. Generally, for mutual fund investments, a fund manager needs a team of analysts who can help them to pick the right stocks. Apart from not needing analysts, active trading of stocks isn’t involved in index funds. These two factors result in the low management cost of index mutual funds. In case you are seeking an investment option in which you don’t need to pay a huge fee, look no further than index funds.
- They are known for providing broad market exposure:
After funds are allocated to an index, the fund manager makes sure that your investments are spread across all sectors and stocks. With this, you can enjoy the financial benefits of the larger segment of the market with the help of a single index fund. For example, you decide to invest in the NIFTY index fund. When you do so, you get to enjoy the investment exposure to 50 stocks that are spread across multiple sectors. With the help of index funds, you can invest in businesses of different sectors ranging from pharma to financial services.
- Index funds are a stable investment option:
Mutual funds are an ideal investment scheme for investors that seek a stable income at regular intervals. As stated before, an alluring feature of these funds is that they do not require extensive market research and stock tracking, teams. For example, you are looking to invest in equities. But, at the same time, you don’t want to expose yourself to the risks that are associated with actively managed equity funds. Instead, you can go ahead and opt for a NIFTY or SENSEX index fund.
- Index funds are also easier to manage:
As a fund manager does not have to worry about the performance of the stocks on the index, index funds are regarded as easier to manage. In this fund, only one action needs to be taken periodically by the fund manager. It is to rebalance the portfolio.
These benefits make it simple for first-time new investors to take the first step toward the equity market with the help of index funds. However, before going ahead and opting for the index fund, please make sure that it matches your investment horizon, risk appetite, and financial goal.