Investing in index funds allows investment in different indexes indirectly and helps you with portfolio diversification.
Through an index fund, your funds are invested in top stocks of different companies in a particular index such as Nifty 50. However, for beginners, it can be challenging to know how to invest in index funds.
In this article, we will discuss index funds and how you can invest in index funds. But before that let’s understand what index funds are.
What are Index Funds?
Index funds are the passively managed mutual funds. They replicate the popular stock market indices like NSE Nifty, BSE Sensex etc. Here the funds are invested in the stocks of the benchmark index in the same proportion.
The fund manager focuses on achieving the same results and doesn’t have to change the fund composition actively like other mutual funds.
The fund here aims to give returns that are close to a benchmark index. This is a plain vanilla investment strategy for the long term.
How do the Index Funds work?
Index funds follow a particular index and track them. These funds are passively managed. The fund manager doesn’t have to actively manage the investment. There is no deep analysis and making changes in the funds.
Let’s understand this through an example. Take for example an index fund that has an NSE nifty index as a benchmark index. The fund invests in all 50 stocks of the NSE Nifty index and the same proportion.
The index fund ensures that the amount is invested in all the stocks that are tracked in the index.
In actively managed funds, the aim is to outperform the underlying benchmark. Index funds passively manage and aim to match the underlying index’s return.
How to Invest in Index Funds?
In this section, we will understand how to invest in index funds India. There are two ways to invest in index funds i.e. offline and online.
Online Process
- In the online process firstly, you need to open a mutual fund account through an investment platform like Dhan.
- After this, you need to complete the KYC procedure. If you have already done the KYC then you can move to the next step.
- Depending on your financial goals, choose the index funds you want to invest in.
- After choosing the fund, transfer the required amount.
- If you want to invest in index funds monthly, then you can set the SIP (Systematic Investment Plan) or can also choose a lump sum option on Dhan.
Offline Process
- In the offline process, you need to visit the bank or mutual fund office.
- You need to fill out the application form for the index fund you want to invest in and submit it.
- You will be required to fill in the necessary information needed.
- Based on your financial goals, choose the index fund.
- Pay the amount of money you want to invest by choosing the preferred payment option.
- If you want to invest each month then you can opt for SIP mode. For this, you can set up BillPay or eNACH, and your bank account will deduct the amount every month.
Benefits of Investing in Index Funds
There are certain benefits of investing in Index funds. They are as follows:
1. Low Fees
Index funds are managed passively. The fund manager doesn’t have to utilize his/her expertise and modify the funds. They just have to match the benchmark index. Due to this, there is a low cost of management.
2. No Bias Investing
The index funds have the benchmark index as their base. The fund manager invests the amount in the same securities and the same proportion as the benchmark index. So, there is hardly any chance of bias.
3. Tax Benefits
Index funds are managed passively. So, there is not much buy and sell of securities as in actively managed funds. Due to this, the capital gains tax liability reduces and increases the after-tax returns.
4. Easy to Manage
Index funds are easier to manage. The asset allocation here doesn’t change. The fund managers don’t have to worry about the stock performance. The manager just needs to rebalance the portfolio if the need arises.
5. Diversification
Here the funds are invested in a similar pattern as the index. Due to this, the investment takes place in various securities and sectors. This offers divarication and spreads risks across multiple stocks.
This ensures that even if one sector underperforms, other stocks in the index can balance that out.
Conclusion
Index funds are the easiest way to start investing in mutual funds. It has the potential to give you competitive returns in the long run. Index funds follow the benchmark index for composition and returns and thus come with lower fees which can lead to better returns for investors.
📌 You can also read:
- How to Invest in US Index Funds from India?
- Which is Better – Mutual Funds or Stocks?
- 10 Best Long Term Mutual Funds in India
Happy Investing 💰
