What are index mutual funds?

mutual funds

As a new investor, you may have considered investing in the stock market to begin investing. But, it can get challenging to venture into new territory without much knowledge.

A safer and proven option would be to consider mutual funds. Here, you may want to know ‘What is a mutual fund?’ or ‘What are the types of mutual funds?’ You may have also come across stock market indices, like the SENSEX and Nifty. To begin your journey into mutual funds, you could start with index funds.

As the name suggests, index funds are equity-based mutual funds that track benchmark indices, like the SENSEX and Nifty. The returns from these funds mirror the growth in benchmark indices. Index mutual funds offer numerous benefits, that make them a ‘must have’ in your portfolio.

Here are some benefits of investing in Index mutual funds:

  • Easy to understand

One essential feature of an index fund is its ease of understanding. These are equity funds that mirror the growth of the chosen index. Other types of mutual funds require in-depth knowledge and research of markets. However, you can track the performance of these funds, just as you follow the indices.

  • Automatic diversification

Benchmark indices consist of different types of companies. These are top companies across all sectors of the economy. Therefore, even if one segment doesn’t perform well, the other areas can drive the markets. Index funds, through their index investment, can offer you automatic diversification. Even with a minimum investment of Rs.500, you can benefit from multi-sector diversification. Since diversification can reduce risk, index funds are more stable than most equity funds.

  • The considerably low expense ratio

An expense ratio is a price you pay to your fund manager to maintain your scheme investments. Index funds do not require thorough research and constant tracking. Therefore, the work of your fund manager is also less analytical. Further, index funds also don’t need investors to review their investments quite often. For this reason, the expense ratio of these funds is lower than other equity-based funds. This also reflects on your returns through these funds.

  • High returns

Index funds are equity funds. Equities may witness short-term volatility, but in the long run, they offer handsome returns. The historical study of benchmark indices, like Nifty50 and SENSEX, shows that markets move positively in the long run. Index funds investments can give high returns to meet your medium term and long term financial goals. Therefore, whether your goal is to buy a new car, or retire rich, index funds can help you get closer to your dreams.

  • Can kick-start your mutual fund journey

Many fund advisors suggest investing in Exchange Traded Funds (ETFs) to start your investment journey. However, for a new investor, it is easier to understand and relate with stock markets. Therefore, if you know the growth of indices, you can efficiently track your fund’s growth, with or without financial advice.

Index funds also have a considerably lower long-term risk as compared to other high-return mutual funds.

Whether you are a new investor or a seasoned professional, index funds offer benefits to all as excellent investments for high long-term returns. They are simple to understand and easy to track and can be used to help you reach medium-term or long-term goals.

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