Slow and steady wins the race – the moral of index funds. In times of rising uncertainties, inconsistent market performance, and unsteady growth of non-indexed companies, index funds are successfully bringing promising returns for investors. It is the trust and confidence of investors in the blue chip companies that bring stability to the index. And these positive sentiments ensure positive returns to investors, as well as, the market.
Helps to remain passive
Being passive doesn't mean being rigid, but being more cautious. If less risk, less cost, but decent return is an investor's priority, and s/he chooses mental satisfaction over greed, then going for index funds is always an intelligent choice. Since the portfolios of these investments are not meant for trading stocks to generate hefty returns, index funds (passive funds) involve low management cost. In comparison to equities (active funds), index funds incur not more than 20% of management cost.
In India, the concept of index funds is slowly gaining traction, even though it is one of the most efficient and actively managed funds. But if one looks closely at the returns of Nifty index fund in comparison to any professionally managed fund, one would find that the former has outperformed them in many ways.
Investing in index funds is a two-step process that delivers good returns with utmost ease and minimum risks involved. Investment in blue-chip companies is simply assessing the stocks and their respective proportion in the market index and then investing the money in the same stocks and in the same proportion. The next step is to ensure that the stocks and their proportions stay in tandem with the index and when the percentage varies, fund managers are required to shuffle the portfolio and make space to reflect the new ones.
Ideal for investors who want safety
An index fund is the best option for people who are not aware of how the equity market works. Anyone who is new to investment should buy an index fund. Ultimately, it grows sooner or later. If the GDP is growing at 7% and inflation is at 6%, the index should ideally grow at 13% in the long run, which is an excellent return for investors. Primarily, there are two factors which help to take the right investment decisions in the stock market. One is the risk appetite, and other is the objective behind investing. Long-term ratio of index fund can be higher than the debt-equity ratio, and in the short term it is the other way round. In case the objective is to increase risk appetite, then in the long run, the equity should be 70% and debt should be 30 %. But if the appetite is conservative, then reverse should be the investment equation.
In index funds the fund manager studies the past and present performance of the index stocks and tries to know whether those stocks would be able to touch the set benchmark or not in the future. Index funds are the best option for people who can't do extensive tracking due to hectic work schedules. Also, it is the safest investment option for people who are new to the stock market.
SAFE AND SECURE
- Index funds offer less risk, less cost with decent returns
- Best option for people who are new to the stock market
- If GDP is growing at 7% and inflation is at 6%, index should grow at 13%, which is good return for investors
The writer is founder and CEO, Finway
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