FAQs on Index Investing

All Index Funds involve passive investing. Passive funds are Mutual Funds that track the stocks in a given index. The fund manager does not make any stock or bond selection by themselves. There are two types of passive funds in the Indian Market, Index Funds and Exchange-Traded Funds. However, there are differences in their investment methods.

An Index Fund works like a standard Mutual Fund scheme where you can buy or sell through SIP or lumpsum investments, and the NAV is declared only after market hours. On the other hand, ETFs worked like any other stock and traded during market hours. Consider these questions on the investment.

Who should choose passive investing?

Those who desire a simple, effective, low-maintenance portfolio should consider passive investing. Investors who understand that today’s outperformer need not be the same tomorrow will be happy with passive funds. Discipline and consistency in personal finance easily trump the “sub-optimal” investment choices.

Are Index Funds or ETFs better?

There is a lot more to passive investing than its costs. The ETFs have lower expense ratios than Index Mutual Funds, but when they are bought and sold, we do so at the market price and not the net asset value. This price significantly differs from the NAV resulting in higher tracking errors and lower returns. You can trade in ETFs using small amounts of capital.

How to choose Index Funds?

While planning how to invest in an Index Fund, avoid getting enticed by small expense ratios. Opt for a fund with at least Rs. 1000 crore AUM. Low AUM results in tracking errors. Measure tracking error in terms of return difference between the index and fund. You should select a fund with a reasonably low expense ratio, tracking error, and reasonably high AUM.

Sensex or Nifty, which is the better Index Fund?

Since both indices are market capitalisation-weighted, there is not much difference. The Sensex is a market-weighted index that includes 30 well-established companies on the Bombay Stock Exchange. Meanwhile, the Nifty 50 is a benchmark stock market index representing the 50 largest Indian companies on average listed on the National Stock Exchange.

What happens when you invest in an Index?

When you buy different types of Index Fund, you get a diversified securities selection in a low-cost investment. Some Index Funds provide exposure to plenty of securities in a single fund, lowering the overall risk through broad diversifications.

What are the transaction costs?

An Index Fund holds investments until the index changes. Since that does not happen often, they have lower transaction costs, making a big difference in your returns over the long haul. They can sell thousands of lots with the lowest capital gains and tax bite. By trading of securities less frequently than actively managed funds, they generate lesser taxable income for their shareholders.

Comments are closed