scorecardresearchShould you invest in index funds? The answer is ‘Yes … Indeed’

Should you invest in index funds? The answer is ‘Yes … Indeed’

Updated: 10 Dec 2022, 01:15 PM IST

Index funds can be just the best addition to your investment portfolio if you are looking to free yourself of the market constraints of choosing funds and then tracking their performance regularly.

Ensure that you have an index fund in your investment portfolio

Ensure that you have an index fund in your investment portfolio

There is a growing interest among investors in index funds considering how many mutual funds of varying capitalization and sectoral funds have underperformed under the impact of market volatility. This is evident from the data highlighting monthly money inflows into index funds. The recent Association of Mutual Funds in India (AMFI) statistics underscore a monthly inflow of 1,08,814.75 crores alone in October as opposed to 1,05,686.79 crore investment into index funds.

There are more than 30 index funds listed in the National Stock Exchange (NSE) alone. The recent launch of the IIFL ELSS Nifty 50 Tax Saver Index Growth Direct Plan allows investors to save on tax while benefiting from index fund investments. As opposed to segregating mutual funds based on their performance and security, index fund investing helps as it allows you access to all the stocks listed in the index without having to bother about checking fund returns and performance ratios.

Investors who are new to mutual fund investing prefer putting their money in index funds instead of categorizing funds based on their risk-return ratios and inherent stability factor. Apart, index fund investing is simple. You just have to check the benchmark index that the fund follows, viz., Nifty50 or the Nifty100 or the Sensex index depending on how you would like to spread your investments.

Relief from the regular humdrum

How many times do we hear of people wanting to get rid of the hassles of tracking their investments? “Invest and forget” is the mantra that these people want to adhere to. Fortunately, index fund investments in a lump sum or through systematic investment plans (SIPs) allow investors, especially, those who are new to the market, to do just that.

Dev Ashish, Founder, Stable Investor says, “An index fund will not beat the best fund manager every year. But it will beat the bad ones very easily. And that is very important. Index funds promise index-hugging returns year after year without taking the risk of fund managers getting things wrong. Earlier the active large-cap funds used to easily beat their benchmark index. But the number of active large-cap funds beating the index has reduced. And this seems to be a clear trend for now. Also, the margin of outperformance of such index-beating active funds has been reducing. Seemingly, index funds are a good option for taking exposure to large-cap stocks. But for mid and small-cap stocks, it is still better to go with active mid-cap funds and active small-cap funds. There is still sufficient scope and leeway for fund managers to show their talent and generate outperformance.”

To invest in index funds, one must have a long-term outlook, which means nothing short of a 15-year investment will do. This will allow them to pursue their long-term financial goals sans the pain of hopping through frequent market downturns by constantly redeeming old funds and clinging to the new.

Most importantly, index funds are largely passive in nature, thus, relieving you of the pain of succumbing to fund manager biases in active fund investing.

Returns from index funds are great

In most cases, index fund returns have outdone earnings from many mutual funds. You compare their returns since inception and will be surprised to find out how relying on a particular market cap or sector has done no good to most investors. If you list some of the best index funds that have consistently performed over the past five years, you will realize how their minimum 16 per cent returns have surpassed the average 12 per cent returns from most mutual funds.

Index funds are delivering good returns comparable to most equity mutual funds with some even outshining the famous and most sought-after mutual funds. In the end, index funds might be the best investment for you if you are looking for peace along with market-linked returns.

Index funds are mutual funds that replicate the portfolio of an entire index like Nifty50. 
First Published: 10 Dec 2022, 01:15 PM IST