Contents
- What is an Index Fund?
- Who can invest in Index Funds?
- Things to be considered as an investor while investing in index funds
- a. Risk tolerance
- b. Return factor
- c. Cost of investment
- e. Financial goals
- f. Tax on gains
- Top 5 Index Funds in India
- Aditya Birla Sunlife Index Funds – Regular Plan-Growth
- Reliance Index Funds – Nifty Plan-Growth
- IDFC Nifty Fund – Regular Plan-Growth
- SBI Nifty Index Funds – Growth
- Tata Index Funds – Sensex – Regular Plan
- CONCLUSION
What is an Index Fund?
Several investors are aware of the benefits of expanding their portfolio across assets. Index funds often catch their eyes in this exploration as they refer to funds that invest in a broader market index – like the Sensex or the Nifty. All the stocks in these signs will find some representation in their investment portfolio. This probably ensures a performance identical to that of the index which is being followed. The low expense ratio is its main USP.
When an index fund follows a benchmark like the Nifty, its portfolio will have the 50 stocks that include Nifty, in the same proportions. An index is a group of securities representing a market segment. These securities can be bond market tools or equity-oriented tools like stocks The common indices in India are stock indices like BSE Sensex and NSE Nifty. Since index funds track a particular index, they fall below passive fund management. In this, the fund manager determines which stocks have to be acquired and traded according to the form of the underlying benchmark. Unlike actively-managed funds, there isn’t a standalone team of study analysts to identify opportunities and select stocks.
While an actively-managed fund aims to strike its benchmark, an index fund’s role is to meet its production to that of its index. Index funds typically generate returns more or less equal to the benchmark. Despite this, sometimes there can be a small difference between the fund performance and the index. It’s known as the tracking error. The fund manager will try to decrease the tracking error as much as possible
Who can invest in Index Funds?
The investment choice in a mutual fund completely depends upon your risk choices and investment goals. Index funds are perfect for investors who are risk-averse and want expected returns. These funds do not require long tracking. For example, if you want to participate in equities but don’t want to take the risks associated with actively-managed equity mutual funds, you can prefer a Sensex or Nifty index fund. These funds will give you returns meeting the upside that the appropriate index sees. However, if you want to earn market-beating returns, then you can opt for actively-managed funds.
Things to be considered as an investor while investing in index funds
While the returns of index funds may match the returns of actively-managed funds in the short run, however, over longer periods, the latter tend to do better. Things to consider as an Investor
a. Risk tolerance
As talked earlier, since index funds map an index, they are less prone to equity-related volatility and risks. Index funds are perplexing options during a market rally to earn great returns. However, you need to switch to actively-managed funds during a slump. It’s because index funds may suffer a higher value as a market downturn. It’s always advisable to have a mix of actively-managed funds and index funds in your portfolio.
b. Return factor
Unlike actively-managed stocks, Index funds follow the performance of the underlying benchmark calmly. These funds do not intend to strike the benchmark but to just replicate the performance of the index. However, many times, the fund returns may not match that of the index on account of tracking error.
There might be deviations from actual index returns. Before investing in an index fund, you need to shortlist a fund that has the minimum tracking error. The weaker the number of errors, the better is going to be the performance of the fund.
c. Cost of investment
Index funds normally have an expense ratio of 0.5% or even less. In contrast, actively-managed funds have an expense ratio of 1% to 2.5%. The logic is that the portfolio of the index funds is not calmly managed and the fund manager need not formulate any mutual fund investment strategy.
The true differentiating factor between the two index funds will be their expense ratio. If two index funds are following the Nifty, both of them will give largely similar returns. The unique difference will be the expense ratio. The fund has a weaker expense ratio will give marginally higher returns.
Index funds, usually, suit people with a long-term investment limit. Normally, the fund undergoes a lot of fluctuations during the short-run which averages out in the long-run of, say, more than 7 years to give returns in the range of 10%-12%. Those who prefer index funds must be stable enough to stick around for at least that long. Then only, you as an investor can realize the fund’s full potential.
e. Financial goals
Equity funds can be perfect for accomplishing long-term financial goals like wealth creation or retirement planning. Being a high risk-high return haven, these funds are competent in generating enough revenue which may help you to retire early and seek your passion in life.
f. Tax on gains
When your units of index funds, you receive capital gains. These capital gains are payable in your hands. The scale of taxation depends on how long you stayed invested in index funds i.e. the holding period.
Capital gains you make throughout the holding period of up to one year are called short-term capital gains (STCG). STCG is charged at a rate of 15%. Conversely, capital gains you receive after a holding period of more than 1 year are called long-term capital gains (LTCG). Owing to new changes in budget 2018, LTCG over Rs 1 lakh will be taxed at 10% without the benefit of indexation.
Top 5 Index Funds in India
While choosing a fund, you need to examine the fund from various angles. There are several quantitative and qualitative parameters to determine the best index funds as per your requirements. Additionally, you need to keep your economic goals, risk appetite and investment horizon in mind.
The following table outlines the top 5 index funds in India, based on the past 5 year results. Investors may favor the funds based on various investment horizon like 3 years or 10 years’ returns. You may involve other criteria like financial ratios as well?
Aditya Birla Sunlife Index Funds – Regular Plan-Growth
Aditya Birla Sun Life Asset Management Company Ltd. is earlier known as Birla Sun Life Asset Management Company Limited is an investment managing corporation registered under the Securities and Exchange Board of India ( SEBI). It is a collective venture between the Aditya Birla Group of India and the Sun Life Financial Inc. of Canada.
| NAV | 110.3704 |
|---|---|
| FUND SIZE | 144.42 Cr |
| EXPENSE RATIO | 0.8% |
| 2 YEAR PLAN GROWTH | 6.17% |
| 3 YEAR PLAN GROWTH | 9.10% |
| 5 YEAR PLAN GROWTH | 7.70% |
Reliance Index Funds – Nifty Plan-Growth
Reliance Industries Limited is an Indian conglomerate operating company headquartered in Mumbai, Maharashtra, India. It has businesses across India engaged in energy, petrochemicals, textiles, natural resources, retail, and telecommunications
| NAV | 18.8465 |
|---|---|
| FUND SIZE | 146.99 Cr |
| EXPENSE RATIO | 0.86% |
| 2 YEAR PLAN GROWTH | 6.48% |
| 3YEAR PLAN GROWTH | 9.23% |
| 5 YEAR PLAN GROWTH | 7.73% |
IDFC Nifty Fund – Regular Plan-Growth
IDFC First Bank is an Indian banking company with headquarters in Mumbai that forms part of IDFC, a combined infrastructure finance company. The bank began operations on 1 October 2015. IDFC received a general banking license from the Reserve Bank of India
| NAV | 23.307 |
|---|---|
| FUND SIZE | 170.57 Cr |
| EXPENSE RATIO | 0.28% |
| 2 YEAR PLAN GROWTH | 7.28% |
| 3 YEAR PLAN GROWTH | 10.14% |
| 5 YEAR PLAN GROWTH | 8.53% |
SBI Nifty Index Funds – Growth
The State Bank of India is an Indian multinational, government sector banking and financial services legal body. It is a government company statutory body headquartered in Mumbai, Maharashtra. SBI is listed as 216th in the Fortune Global 500 list of the world’s biggest corporations of 2018
| NAV | 96.7668 |
|---|---|
| FUND SIZE | 432.71 Cr |
| EXPENSE RATIO | 0.68% |
| 2 YEAR PLAN GROWTH | 6.80% |
| 3 YEAR PLAN GROWTH | 9.72% |
| 5 YEAR PLAN GROWTH | 7.88% |
Tata Index Funds – Sensex – Regular Plan
First named the Investment Corporation of India, the company is essentially involved in investing in long-term investments such as equity shares, debt fund instruments, listed and unlisted, and equity-related securities of companies in a wide range of industries. The origins of income of the Company consist of dividend, interest, and profit on the sale of investments.
| NAV | 93.3523 |
|---|---|
| FUND SIZE | 12.17 Cr |
| EXPENSE RATIO | 0.46% |
| 2 YEAR PLAN GROWTH | 8.98% |
| 3 YEAR PLAN GROWTH | 10.93% |
| 5 YEAR PLAN GROWTH | 8.05% |
CONCLUSION
Index funds are an excellent way to invest in a buy and hold investor. You will exceed over two-thirds of market participants over the long term and at a lower cost. Not to consider much less time spent examining and analyzing stocks.
This is because active investors either have difficulty in choosing the winning stocks or they let their reactions and preferences impact on their decisions and end up buying and selling at the wrong time.
To make a successful investment in index funds, you can visit our website Wealthbucket. We offer various services like Equity Mutual Funds, Debt Mutual Funds, Balanced Mutual Funds or Income Funds. Moreover, you also give us a call at +91 8750005655, our experts are always present for the betterment of investors. Also, you can email at contact@wealthbucket.in.
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