All you need to know about investing in index funds

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If you’re a keen mutual fund investor or looking to invest in them, you must know about index funds. These are yet another type of mutual funds popularly known as passive funds. These funds track the index of the market or sector where they are invested. They are not linked to any single stock, debt or company, in fact, their underlying asset is the benchmark indices. Often, index funds are associated with low to medium-risk.

“The best strategy for an index fund is that you invest in it for a long duration as the index has a proven track record of giving good returns in the long run. So if you are a new investor and intend to invest with a distant financial goal, index funds can be a good option,” Prateek Oswal, Head of Passive Funds at Motilal Oswal, said.

You can invest in index funds through SIPs and hence a demat account isn’t required here. However, one must scan their financial portfolio before investing in any new type of funds. Now we also have index funds that track equities, debt and gold.

In a recent episode of Money9 Helpline, callers had several doubts regarding index fund investing.

“In index funds, does the fund manager only buy and hold, or does he book profit as well,” Pramod Raj asked.

“A fund manager’s role is to mirror the weightage of index funds in Nifty. If a stock is moving out, the manager will remove it from the funds as well while if a stock is entering the Nifty, the manager will move it in the funds. So Nifty also periodically rebalances its weightage. Basis the Nifty rebalancing, the fund manager will also look to re-balance the stocks in the index funds. So, it is not his own call. It depends on Nifty performance,” Gurmeet Chadha, co-founder, Complete Circle Consultant suggested.

Another caller, Ashish Darji, asked, “By investing in Index funds and with help of technical analysis and F&O data, we can get more than 25% return per annum by 2-3 switched between different index funds. Please review my strategy.”

“You are defeating the purpose of passive funds with this strategy. Passive fund investing is a gradual long-term and regular investment. The returns gained from them are not linear. As we know the index funds mirror the inflation plus economic growth, so investing demands time. The index reflects the economy and organised sector,” Chadha replied.