What are index funds? Key points to consider before you invest in them
These funds track the index of the market or sector where they are invested
Index funds are also a type of mutual funds which are also known as passive funds. These funds track the index of the market or sector where they are invested. That is, they are not linked to any single stock, debt or company, but their underlying asset is the benchmark indices.
How risky are they?
It is not that there is no risk in an index fund but it is low. You can say that an index fund is a low to medium-risk product. If the market falls then index funds will also feel the heat. Prateek Oswal, Head of Passive Funds, Motilal Oswal, believes that the best strategy in an index fund is that you invest in it for a long time because the index has proved to give good returns in the long run. So if you are a new investor and intend to invest for the long term then index funds can be a good option.
How to choose an index fund?
Two things to keep in minds while choosing an index fund are:
1) Tracking error: Choose the fund only after comparing the returns of the underlying index and the index fund. The lower the gap between the index and the returns of the fund, the better.
2) Expense ratio: With every fund, the fund manager takes this price from you to manage that fund. The expense ratio of an index fund is less than that of an actively managed fund, but look at the ratio of different companies to ensure that the cost is low for you.
It is not necessary to have a demat account to invest in index funds. SIP can also be done in these. But before investing, check your risk profile. Index funds tracking equities, debt, gold and now international index have also arrived. Motilal Oswal’s Prateek Oswal believes that index fund are a good option for low-risk takers and index funds are good enough to diversify a portfolio as well.
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