Thursday, 20 September 2018

INDEX FUNDS Index funds vs Mutual funds

What is an Index Fund?

Before knowing what is an index fund, let us first know what is an index? An Index or Stock Index is a statical measurement of change in the securities market. An Index is basically a tool used by investors and financial managers to describe the situation of the market. An index is formed by combining various stocks of similar type among all stocks listed on the exchange.

Stocks indices are classified based on market capitalization, Industry/stocks, Board market ( like S&P 500), Free-float market capitalization. 

There are two major exchanges on Indian stock market 

1. NSC ( National Stock Exchange )
2. BSC ( Bombay Stock Exchange )
And major indices of India

1. Nifty 50 
2. Bsc Sensex
3. Nifty Bank
4. Nifty IT etc.
                                   source :pexels

Now, coming on Index Fund, an Index fund is a mutual fund that invests in an index, that means index fund buy all the stocks of a particular index in the Same proportion as actual index have. 

Index funds perform as the same index it is tracking, but not exactly match the actual performance, and the difference is known as tracking error and also index funds change management fee which cut down a little percentage of return.


Index funds vs Mutual funds

Fee or Cost: "Mutual funds" which are also known as actively managed funds are charge more than passively managed funds like index funds.

Mutual funds charge a fee of average (1-2 %) no matter how funds are doing but they will still charge you fees, whereas index funds don't charge that many fees.

Return: Fund manager in an actively managed funds or mutual funds always tries to earn an extra return over the benchmark or index, but in an index fund they just replicate the performance of the index. So, the return of mutual funds can be higher than index funds.

Risk: There is always risk in equity-market, Index funds gives a good return during the upward flow of market, but it is good to invest in actively-managed mutual funds during fall, having mix portfolio of an index fund and mutual fund is good for your financial goals, and always consider index fund for long-term goals.

In my opinion, investing in an index fund for a long-term period is better than investing in mutual funds.