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Why Are Index Funds Known For Being Low Cost?

Introduction

Have you ever wondered what it is like to own a market standard? To hold a type and measure of a product that is used as a benchmark and compared to by consumers and the industry? With an index fund, you can do exactly this.

An index fund is a financial instrument made up of a portfolio of stocks or bonds or commodity that is designed to track the performance of its underlying index. It can either be made of one category of these securities or can be a combination of different categories.

By investing in these funds, you not only gain exposure to a diverse range of companies within that specific category but also become a part of the larger narrative of the financial markets. It's an opportunity to align your investments with the broader economy and share in the growth and progress of industries and sectors that shape our world.

What are index funds?

An index fund is a financial instrument that tracks the performance of a particular index/benchmark. The primary investment objective of an Index Fund is to provide investment returns closely corresponding to the total returns of the securities as represented by its respective benchmark Index before expenses, subject to tracking errors. When you buy an index fund, you access a relatively low-cost way to replicate the key indicator of stock market value. These instruments are managed based on the principles of passive investing and carry less systemic risk and potential for human error or bias.

How do index funds work?

Index funds

track and mirror the returns of any market index that it is based on an asset class such as equity, debt, or commodity. So, it is a product that seeks to capture the returns that are in close approximation to the underlying index.

What are index funds

and how they work are best answered by their activities. Simply put, they buy, sell, and hold stocks of companies in the same proportion or market weight as in the underlying index. The quality of such a mutual fund is measured by how effectively and closely its returns match the underlying index.

Fund manager’s have a clearly defined scope of activities here - and do not participate in stock picking.

Advantages of investing in index funds

There are some clear, straightforward, and simple advantages of investing in index funds. These include:

• Free from human bias:

Since there are no elements of active investing like analysing companies, buying or selling stocks, or responding to market volatility, index funds can be bias free.

• Lower cost:

The cost for mutual funds is usually within reasonable parameters that are set and reviewed by the Securities and Exchange Bureau of India (SEBI). Yet, index funds are a cleaner and simpler, passive solution with less activity than an actively managed mutual fund. Correspondingly, cost of research for stock picking is eliminated, leading to index funds being provided at a relatively lower cost compared to active mutual funds.

• Broad market exposure:

An index fund based on a market index, provides exposure to a broad category or section of the market such as equity or debt. This helps investors with providing diversification benefits and eliminating the need to purchase individual securities.

• Low portfolio turnover:

Equity market indices alter less frequently and are managed by a set of rules and criteria. Stocks become a part of an index after meeting those rules. As index fund track or mimic the composition of its underlying index, the rate of ‘portfolio churn’ or changing of stocks in index funds is low - which points to its steadfastness and stability.

What are the steps to invest in index funds?

If you're seeking guidance on investing in Index Funds in India and need assistance with the purchasing process, you're in the right place. This section provides insights into both online and offline methods for investing in Index Funds.

Online Method:

1. Start by opening a mutual fund account through a secure website.
2. Ensure you've completed your KYC (Know Your Customer) procedures if you haven't already.
3. Provide the necessary personal and financial information.
4. Based on your financial goals, select the specific fund or funds you wish to invest in.
5. Choose the Nippon India Index fund here and transfer the required investment amount.
6. If you prefer to invest monthly through a systematic investment plan (SIP), you can set up a standing instruction with your bank.

Offline Method:

1. Begin by filling out the application form and the KYC form carefully and comprehensively.
2. Enter all the required information accurately.
3. Depending on your financial preferences, choose the fund or funds you intend to invest in.
4. Make the investment payment using your preferred payment method.
5. For those interested in monthly SIP investments, you can set up digital or offline methods

Whether you opt for the online or offline route, you can now confidently invest in Index Funds in India.

Taxation on Index Funds

Index funds are taxed based on their equity composition and the duration you hold its units. For example, mutual funds with 65% or more of assets under management invested in equity and equity related instruments are taxed as equity funds. This means that gains from such a mutual fund are labelled as capital gains.

If these gains come from holding units for less than 12 months, then the returns are taxed at 15%. However, if these gains come from holding units for more than 12 months, then such returns are tax-free up to a financial year limit of Rs. 1,00,000. After capital gains cross this amount for the financial year, they are taxed at 10%.

Conclusion

Index funds are also popularly called as Low-Cost Index Fund due to the lower cost of expense ratio compared to its active peers. The costs involved for the same is usually within reasonable parameters that are set & reviewed regularly.

More importantly while investing one should consider one’s own financial goal, risk appetitive before investing.


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Disclaimer:
Helpful information for investors: All Mutual Fund investors have to go through a one-time KYC (know your Customer) process. Investors should deal only with registered mutual funds, to be verified on SEBI website under 'Intermediaries/ Market Infrastructure Institutions'. For redressal of your complaints, you may please visit www.scores.gov.in . For more info on KYC, change in various details & redressal of complaints, visit mf.nipponindiaim.com/investoreducation/what-to-know-when-investing This is an investor education and awareness initiative by Nippon India Mutual Fund.

The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document. Language Disclaimer:
While utmost care has been taken in translating the article into respective regional language(s), in case of any confusion or difference of opinion, article available in English language should be deemed as final. The article provided herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional advice for the readers. The document has been prepared on the basis of publicly available data/ information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of loss of profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this article. "ABOVE ILLUSTRATIONS ARE ONLY FOR UNDERSTANDING, IT IS NOT DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF ANY SCHEME OF NIMF. THE VIEWS EXPRESSED HEREIN CONSTITUTE ONLY THE OPINIONS AND DO NOT CONSTITUTE ANY GUIDELINES OR RECOMMENDATION ON ANY COURSE OF ACTION TO BE FOLLOWED BY THE READER. THIS INFORMATION IS MEANT FOR GENERAL READING PURPOSES ONLY AND IS NOT MEANT TO SERVE AS A PROFESSIONAL GUIDE FOR THE READERS."

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