In the investment market there are different types of mutual funds available for investor. Although there are less than 1.5% Indians invested in the mutual fund as per data by AMFI’s in 2018. Still many of the future investor are afraid of mutual fund. And they are losing the future opportunity.
Most of the think that to invest in mutual fund they required lots of knowledge and this is the true without knowledge playing in investment market is like gambling.
But there is one type of mutual fund available in the market which is not required that much knowledge as other thinking. This not required any expertise and year of experience. The name of the fund is INDEX FUND.
Lets look into the index fund and see how this will be beneficial to the investor who do not know that much about mutual fund.
Index mutual fund is a fund which holds and invest in market indices Sensex and nifty. Index fund reflect the stocks which are in Sensex and nifty. It hold in same proportion as that of Sensex and nifty.
This fund is not active fund. This fund passively manage. So there is low expense ratio.
This fund is not risk taker. This fund balance the fund and gives the return as per sensex and nifty indices.
As this fund passively manage so this fund perform average. This fund not give high return as per other mutual fund because other mutual fund manage by financial expert persons. They do not aim to beat the market. They just balanced the investors risk.
Why Index fund
After looking the definition, advantage and disadvantage why every future investor should invest in the mutual fund ? Lets answer this question from below points.
Every non-investor and the person who only dream to invest in the market to earn lots of profit they think that this is the game of the person who highly qualified.
This market is for those who knowns the every aspect of market and commerce related stuff.
This all things are not a totally wrong. But if you known the basic thing of market then this market is for you. Only common sense is required to earn the profit not a knowledge every time.
Index fund is suitable for every person who just want to start investment and earn the small percentage profit. For this you do not required to do separate study of the market. You do not required any balance sheet or other things to start the investment.
2. Risk –
Risk involve in index fund is low as this fund is diversified. Risk is low as compared to owning individual stock. As this fund diversified so it will not fluctuate a lot than any other single stock .In index fund stocks which are hold are set as per the indices but you can not change their proportion and replace other stock with some stock. Means you can not set fund as per your favorite company stock. This will not give any freedom to the investor to test the fund in different sector. So this will lead to the low return with balanced portfolio.
As you seen that there will be no changes in stock and sector to gain more profit , this fund will not outperform the market but it will give return which will be equal to the market indices. This return are suitable for those who do not want to take more risk. This is suiable for those who want balanced portfolio and average returns.
As this is passive managed fund so there will low charges expense ratio which lead to take you more amount.
Lets compare the index fund and Active fund , how they are different from each other.Also compare Index fund and ETF.
Index fund Vs Active fund
As we seen index fund are passively manage. Fund manager do not change the stock proportion and not replace any stock which leads to average return. Index fund do not take high risk but give average return.
Active Funds –
Active fund are handle by professional financial expert they shuffle, replace the stock in different sector to gain the more returns. Active fund manager take high risk to give more profit to their investor. This fund manger every time they research on different stock, they analysis the different company every time. They find the opportunity to gain maximum profit .For this reason this types of fund gets maximum output as compared to the index fund.
ETF (Exchange trade fund) this fund are traded on stock market during market timing.
This fund purchase through demat account. ETF listd on stock market and anytime anyone can buy or sell through demat account. The most common type of ETF are as follow.
Equity ETF, Gold ETF, Currency ETF, Debt ETF.ETF traded like a share so their price also changes as share price changes in live market.Sometime we buy ETF at high price and sell at low price and vice versa it is depend on buyer and seller available in the market for that particular share.
|Aim||Duplicate the performance of given index||Chasing the performance of indices of a particular exchange.|
|Price||Executed at the end of the day||Change with real time|
|Liquidity||Easy||Moderate ( You can buy or sell only if there is counterparty to the trade)|
|Amount required to invest||Minimum 500 Rs||Minimum 10,000 Rs|
|Sip or Lumpsum||Both option||Only lumpsum|
|Where to purchase||Not required Demat account.You can purchase from any AMC.||Required Demat account.You can purchase with any brokerage company.|
What is main thing to look
We see all the basic thing related to the index fund and there advantage, disadvantage .Now when someone will go for index fund then what they first look before investing into it.
This below point is not restricted to the index fund it is applicable to the every type of mutual fund.
1.Exit Load –
It is fee which charge by Asset Management Company to the investor when he exit the fund units.It is applicable when you redeem the invested amount within some particular time frame. It is applicable for some particular lock in period.
It is different for different type of mutual fund. It is better to not exit or redeem amount for some particular time which is specify in the mutual fund. It is always better to invest for long time period.
2.Expense Ratio –
Expense ratio is charge by Mutual fund House from investor for managing the mutual fund. Mutual fund manager are giving their best to give better and maximum return on investor money. Manager do the all research about the market, stock. They using the different tools to get specify data related to the mutual fund. Manager and their team manage all this things.
To give maximum return to their investor all this thing are required. So this ratio covers all this expenses.
Active mutual fund have high expense ratio as compared to the passive mutual fund. As active fund gives more return as compare to the passive fund.
There are others ration in mutual fund which we required to look while investing in mutual fund however this above two ratio are most important to watch for beginner.
Every mutual fund have their advantage and disadvantage. Mutual fund are basket of stock market. Index fund is best way to start investing in market. It is always better to invest in mutual fund rather than directly going into the individual share. As mutual fund decrease the risk as it is in individual stock.
After taking and reading all the information about the index fund now it’s your call whether to invest or not or loose the future return opportunity.
Disclaimer- This post is for knowledge purpose we do not recommend any mutual fund or stock it is depend on everyone’s financial goal.