Mutual Funds Day 35: Index Funds
Index funds can be considered as the King of Mutual Funds. There are two reasons why index funds are gaining huge popularity
- Lower Expense Fees
- Tracks the benchmark index itself
Let us analyze both points in detail.
If you have not read the chapter about expense ratio, read the same at
https://viswaram.com/mutual-funds-day-15-expense-ratio-7a6f5942f944
Index funds by design do not require an active fund manager or a team of analysts. It is called passive investing because the amount you pay gets allocated proportionately as per the weights decided by the stock exchanges. For example, suppose NSE (National Stock Exchange) decides the weight of HDFC Bank is 11.48%, Reliance is 9.96%, ICICI is 8.11%, Infy is 5.09% and L&T 4.27% — then the amount that you contribute will get automatically split as per this weightage & gets invested.
If you invest a lumpsum of 10,00,000 rupees in Nifty50 index fund, then it will get allotted as
- 114800 to HDFC
- 99600 to Reliance
- 81100 to ICICI
- 50900 to INFY
- 42700 to L&T
The remaining 45 stocks will also be purchased as per the weights mentioned in the table. The fund manager only buys as per the standards set, he would not change the weightage of Reliance from 9.96% to 15% even though he feels it has an upside potential.
Since an active fund management intelligence is not required, index funds have a lower cost to run. This benefit is passed onto investors in the form of a lower expense ratio.
Secondly, the mutual fund will track the index itself. In this case, it tracks Nifty50. Indices are very popular among business news channels, investment bankers & government agencies. For reporting purposes — they always carry the headline information only, say Nifty50 closed 100pts higher, or Sensex closed 350pts higher.
So when you buy an index fund, your portfolio returns will automatically match the country’s headline indices. Even if you do not have time to monitor your personal investments, looking at how Nifty50 or Sensex closed the day/week/month will give you a fair idea of performance.
The popular indices which have index funds are :
- Nifty50
- Sensex
- Nifty Bank
- Nifty Auto
- Nifty Commodities
- Nifty Financial Services
- Nifty FMCG
- Nifty Healthcare
- Nifty Consumption
- Nifty IT
- Nifty Midcap
- Nifty Smallcap
- Nifty Next 50
Among these Nifty50 and Sensex index funds are the most popular and liquid. Nifty Midcap and Smallcap also attract huge inflows due to their higher risk:reward potential.
The debt category also has indices
- Nifty 10 yr Benchmark G-Sec
- Nifty 1D Rate
- Nifty 5 yr Benchmark G-Sec
- Nifty 8–13 yr G-Sec
- Nifty Bharat Bond — “YEAR”
Examples
Next Chapter
https://viswaram.com/mutual-funds-day-15-expense-ratio-7a6f5942f944
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