Who should invest in Index Funds?

We as Indian investors have plenty of options to choose from when it comes to mutual funds. In India, several investment companies are offering mutual funds various lucrative schemes, thus taking care of almost every investor’s personal financial needs. That is because all of us have different financial goals and our appetite for risk varies too. Having said that, each investor has a different investment horizon depending on short term or long term financial goals. In addition, investors are always looking for various schemes & investment plans to diversify their portfolio across various assets. Index funds are one such great option that always meets the expectations solely because they omit the traditional style of investment and invest in broader market indices like the NIFTY and SENSEX.

Let us find out if index funds are a good investment option for you and whether you should consider putting your hard earned money in index funds.

So should you be investing in index funds?

Several retail investors do not wish to let their gains get affected by market adversity. An investor depending on his or her financial goals and risk preference decides which mutual fund to opt for. Many investors demand fixed returns even though they may fetch gains from lower interest rates as compared to schemes that offer higher capital gains depending on the current market conditions. 

In the case of index funds, their performance does not depend on market’s volatility. Index funds track the index, but the index is comprised of individual stocks. Therefore, if a heavyweight stock in the index performs extraordinarily well, or if it is beaten down, this has an impact on the entire index. Index funds are a perfect choice for investors who do not have a large risk appetite and want to fetch steady returns over a long term. In the short term, index fund may perform similar to an equity fund. However, in the longer run, index mutual funds tend to perform better. Hence, any retail investor with an investment horizon of more than five years has a chance of scoring decent capital gains through investing in index funds.

Let’s take an example to understand if index mutual funds are apt for you:

If you choose to participate in an equity mutual fund but do not want to undertake risks associated with actively-managed equity funds, you can choose a NIFTY or SENSEX index fund. The returns that you will fetch from these funds will be matching the upside that the particular index sees. At the same time, the fund management fee that is charged for an index fund is much lower compared to an actively managed fund. That can be an added advantage.

Index funds are worldwide famous fund schemes and in the past few years, they have benefited investors not in just in the United States or India but across the world. Ever since their inception in August 1976, index funds have, helped investors across the globe fetch decent returns and continue to do so till date. Ideally, anyone can invest in index funds as long as they are alright with the market index deciding the fate of their fund’s gains. Always keep your financial objective in mind before deciding to choose any type of fund.