Index funds are specialized mutual funds that try to replicate popular stock market indexes such as Sensex, nifty etc. All the stocks in the index funds are in same proposition as that of index. The fund manager does not act as active fund manager. He simply copies respective index in order to build fund portfolio. The fund portfolio always remains in sync with index. Whenever changes in the composition of index is done the fund manager buys or sell the stock from the portfolio to make adjustments. These funds are likely to give same return as that of index. However, there will be associated tracking error. In this post, we will discuss about type of index fund and investment benefits.
Let’s try to understand index fund with example. Suppose one fund is tracking BSE Sensex. As BSE Sensex comprises of 30 stocks, so the fund also contains same stocks in same proposition. If index includes equity and other instruments such as bond the fund manager invests in other instrument also.
Who should Invest in Index Funds?
Index funds are fund for the risk averse investor. The investors looking for predictable return in equity market with diversity can opt of these funds. As Index fund track market index and managed passively, risk will be less. The investors looking for higher returns should go for actively managed fund. Actively managed funds will give better return compared to index fund in the long term.
Index fund also carry market and volatility risks and advisable for the long term investor only. There are three types of index fund available for the investors.
- Fund that track Sensex – 30 Stocks
- Fund that track Nifty – 50 Stocks
- Index Plus fund – Portion of fund in index and reminder is actively managed
Things to consider before investing in Index Funds
Important things to consider before investing in Index Funds are given below.
Tracking Error
The return generated by index fund are not at par with that of index. The deviation is return is known as tracking error. The tracking error should be checked before investing in index fund. The lower the tracking error better is fund performance.
Performance of Fund
Performance of fund is extremely important while selecting any fund. You should check historical performance and compared with benchmark index. Additionally, you should also do peer comparison while selecting fund.
Expense Ratio
Expense ratio is another important factor to consider before investing. The expense ratio of the fund should be low. Lower the expense ratio better is fund performance. Avoid selecting fund only on the basis of expense ratio.
Top Index Fund 2021
HDFC Index Sensex Fund
HDFC Index Sensed Fund as the name suggest this fund track S&P BSE Sensex subject to tracking errors. This fund is ranked moderately high. Expense ratio of this fund is very low 0.3%. CRISIL rating of this fund is 3 Star. The fund gives returns nearly equals to S&P BSE Sensex.
SBI Nifty Index Fund – Direct Plan
SBI Nifty Index Fund track Nifty 50. This fund is very high risk rated fund. Expense ratio of this fund is 0.1%. It is CRISIL 3 star rated fund. Fund capital is 1000 Cr+. It is passively managed fund. This fund has given return nearly equal to Nifty.
UTI Nifty Index Fund – Direct Plan
UTI Nifty Index also track Nifty 50. It is moderately high rated fund. The fund capital size is 3000 Cr+. Expense ratio of this fund is very low 0.1%. It is CRISIL 3 star rated fund. Tracking error of this fund is very low. This fund gives returns higher than the category average return.
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