What are Index Funds

These are mutual funds that track one of the market indexes like Sensex or Nifty. The fund manager, here, does not get to select the stocks the fund will invest in. The fund portfolio will mirror the index that it tracks as accurately as possible.

Sensex is an index derived from 30 most actively traded stocks on the Bombay Stock Exchange (BSE). Similarly Nifty is the benchmark index of the 50 most actively traded stocks on the National Stock Exchange (NSE). Now the fund “HDFC Index Fund-S&P BSE Sensex” tracks Sensex where as “HDFC Index Fund-NIFTY 50 Plan” tracks the Nifty 50.

How are Index Funds Different from ETFs

The main difference between index mutual funds and Exchange Traded Funds (ETFs) is that index funds track market movements via Net Asset Value (NAV) which updates only at end of trading day. Whereas, ETFs track underlying asset value movement on the fly, throughout the day.

If we compare mutual funds vs index funds vs ETFs, mutual funds and index funds are fundamentally the same except that index funds do not have the flexibility to pick stocks and their weightage in its portfolio. ETFs have an advantage in short term investments over indexed funds. But in the long term, they are almost the same.

Index funds are popular with long term investors with a low risk investment. Especially for people looking for some passive income ideas, index funds are a good choice since they provide good returns with diversified risk.

How does an index fund work

These funds mimic the composition of the chosen index. They are passively managed funds, which means there is no stock research, risk mitigation, diversification that needs to be done by the fund manager. All of this is automatically taken care of by the index. The objective is to depend on the returns of the index over a long period without buying and selling securities very often.

To Know More About “How To Choose the best Index Funds to Invest”, Check here