Mutual Funds, Short term programmes

Why choose index mutual funds over other mutual funds?

Mutual funds

Mutual funds

“To make the most of your money, I recommend sticking with mutual funds that don’t charge a commission when you buy or sell.”

Suze Orman

 

Let’s not confuse some effort/ activity with progress!  We regularly see mutual fund advertisements, but investing in any mutual fund scheme is not a sure way to multiply your investments. You still need to pick a right investment/ mutual fund to get a desirable on investment.

For the best possible returns on investment, it is a must to read the mutual fund fact sheet, follow the industry the fund is investing in and track the record of the fund manager meticulously. Doing these three regularly is difficult for working professionals. So how can one take advantage of the market linked funds? How do we benefit if the stock market appreciates?  If you cannot track the 3 mentioned above, you can simply invest in index funds.

Index mutual funds aims to mimic returns of benchmarks, like Nifty or Sensex, and have seen their assets rise over 60 percent over the past one year. An index fund invests only in the stocks of companies which are performing very well. Ex: A BSE sensex index fund consists of investments made only in stocks which make up the BSE or NSE sensex. As an index fund, the Mutual Fund can invest only in these stocks. If any stock falls off the BSE sensex, the fund has to exit that stock and reinvest their money. There are many other funds, which invest solely in top performing stocks in certain industries.

The stocks which form a part of a stock exchange’s index are stable companies, which have given fabulous returns over a period of time. These companies have stable, reliable managements, that have a reputation for establishing and growing businesses into multi national corporations. These stocks are used for a variety of indexing and other macro-economic indicators This is because it offers better returns than schemes that invest in a broader set of stocks have drawn smart investors to them. As per data compiled by ETIG database, Index funds (excluding Exchange Traded Funds or ETFs) saw their assets jump from ₹3,773 crore in April 2018 to ₹5,275 crore in April 2019.

Index funds aims to invest in fixed set of stocks which generally comprise of key market gauges like the Sensex and the Nifty. This requires minimum skills of the fund manager. In the past one year, it has been noted that actively-managed schemes and portfolios decided by fund managers have under performed their benchmark indices like the Sensex and Nifty.

Many fund advisors and financial planners believe that index funds are likely to make their presence felt in India in the coming years. As many large-cap funds need to invest a minimum of 80% of their portfolio in the top 100 stocks by market capitalization, the category could struggle to beat the indices. Earlier, many such large-cap funds took exposure to mid- and small-cap stocks and managed to beat their benchmarks.

Financial planners believe the biggest advantage of an index fund is its low cost with passively managed funds costing as low as 20 basis points (0.2%) in regular plans — those advised by distributors. In contrast, actively-managed equity funds could charge 150-225 (1.5-2.25%) basis points in the regular plan. ETFs, are a substitute for index funds and are cheaper than index funds. However, you need to maintain a demat account and pay brokerage when buying or selling these units.

Fund houses have increased passive investment products over the past couple of years. Recently, Indiabulls launched the Nifty 50 ETF, while DSP Mutual Fund has launched the DSP Nifty 50 Index Fund, DSP Nifty Next 50 Index Fund ; a mix of active and passive management funds.

As these funds have outperformed most fund managers in the market, it can be safely said that exchange traded funds and index funds are safe investments that give you great returns.

BSE Institute is a 100% subsidiary of BSE India, the world’s largest stock exchange. We offer multiple courses that help students, investors and working professionals move up the corporate ladder and invest better. Our short term course on Building Wealth with Mutual Funds helps you invest better in mutual funds. It is available online on bsevarsity.com, and can be learnt via live sessions. Use BSE’s experience of the stock markets to build a bigger and a better portfolio.

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