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Index Mutual Funds: Meaning, Working & Long Term Benefits of investing in Index Funds​

Today, we are living in a world of comfort and convenience. Instead of waiting in a long queue at the bank, we can do multiple transactions from the banking app from the comfort of our homes. We can enjoy the holidays without worrying about travel bookings and hotel reservations, as professional tour planners can take care of these things. It’s great when things become easy and require minimal involvement, isn’t it? And with index funds, you can enjoy this same convenience and ease in your investments.

Index mutual funds are passively managed mutual funds wherein the fund portfolio closely resembles the underlying index's portfolio, and the scheme aims to track its benchmark’s performance. Read on to learn more about index fund mutual funds.

How do Index Funds work?

Thousands of companies are listed on the stock market, which may perform differently daily. A particular market index represents the overall performance of these companies, thus helping the investors get an overall idea of the performance of the market. A mutual fund ​that tracks this market index is known as an index fund.

An index fund tracks its underlying index in terms of components as well as weightage. As in, it invests in only those stocks that form part of the respective index and in proportion to their weightage in the index. Therefore, the portfolio composition and performance of the index funds aim to remain in sync with its underlying index.

Index Funds Benefits


One can invest in Index Funds to avail of the following benefits:

1. Lower expense ratio

As index funds are passively managed, a team of researchers/analysts is not required to study the trends, macroeconomic factors, buy/no buy decisions (like active management) etc. Thus, they have a relatively lower expense ratio than actively managed funds.

2. Lower human bias

There is less chance of a fund manager’s bias affecting the allocation of an index fund, as here, the aim is to track the index, and the fund manager is not actively involved in the fund’s stock selection.

3. Transparency

The companies that constitute the benchmark index and their performances are publicly disclosed from time to time, and it is easy to monitor these indices. This may help boost transparency as the investor can check the companies in which the index fund invests.

4. Diversification

The companies included in an index may belong to different sectors, providing a readily diverse portfolio by investing in a single index.

5. Choice of indices:

An index may also represent companies of a particular market cap, sector, or theme. Thus, the investor can choose from a range of indices.​

What are the long-term benefits of investing in Index Funds?

A long-term investment horizon of 7 or more years is suitable for investing in index funds. This is because the stock prices of individual companies may rise or fall in the short term, but the overall market may increase in value over a long time. ​

Thus, index funds may help passive investors fulfil their long-term goals like retirement planning, children’s education, etc. So, for new investors or investors who don’t have the time to study and time the market, index funds may be a suitable option.

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 affiliates 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.

Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.

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