scorecardresearchWhy are index funds good investments for long-term investors? MintGenie

Why are index funds good investments for long-term investors? MintGenie explains

Updated: 22 May 2023, 01:55 PM IST
TL;DR.

Index funds are suitable for long-term investors as they offer market-level returns with minimal human intervention.

The easiest way to understand 'Indexing' is to realise that it is a form of passive fund management.

The easiest way to understand 'Indexing' is to realise that it is a form of passive fund management.

Long-term investments usually give good returns and if you have money and less time to trade in stocks, you may also consider mutual fund investments. Index funds are the best way to passively invest in stock markets.

These funds are typically mutual funds that tend to replicate market indexes such as Nifty50, Nifty Next 50, Sensex etc. Legendary investors like Warren Buffet have also advocated investments in index funds. A bucket of experts believes that index funds are good investments for long-term investors.

How do index funds work

The easiest way to understand 'Indexing' is to realise that it is a form of passive fund management. Here, the fund manager creates a portfolio which replicates the securities of an index instead of investing time and strategizing on buying-and-selling of stocks.

Mirroring the profile of the index means that the fund will perform at par with the stock market as a whole. For example, if a fund is linked to Sensex and the Sensex appreciates 5 percent, subsequently, the fund will also appreciate 5 percent and vice-versa.

Index funds are not just limited to stocks. It includes instruments like equities and bonds.

Why should long-term investors invest in index funds?

Continuous tracking performance is not required: You have to keep a continuous track of actively managed funds to know if they are performing well. A market crash may lead to a drop in the funds. So, these funds require keen attention. Whereas, in the case of index funds, it is otherwise. It will perform as long as the index performs. Invest in index funds for a minimum period of 5 years.

Satisfied with market returns: Index funds are suitable for those investors who are happy with the market returns and are not willing to take extra risks to earn higher returns. The returns offered by index funds are of market level as it mirrors the market index and the returns are up to what the index is generating.

Lesser human interventions: Investing in index funds means there are lesser human interventions. Since these funds are correlated with the market performance, investors don't have to time-and-again check and rate the performance of the fund. These funds will perform independently of the fund manager's beliefs and convictions.

If all these criteria match your risk appetite and belief system, you may opt for investment in an index fund for the long term. Remember to take professional help while deciding to invest in mutual funds.
 

Article
Index funds are mutual funds that replicate the portfolio of an entire index like Nifty50
First Published: 22 May 2023, 01:53 PM IST