How to select Index Funds for investment?

There are hundreds of investment options in the Indian stock markets. It confuses average investors as they do not have clarity on how to invest in them without taking too much risk. Mutual Funds offer some risk mitigation to retail investors through lumpsum or SIP investments. An index is a group of securities that define a market segment.

An Index Fund is a Mutual Fund that invests in stocks that are part of the index in the exact proportion of the stocks in the index itself. They replicate the performance of the benchmark indices and involve passive management.

Working

All Index Funds track a benchmark trend, such as the Sensex or Nifty. The investment portfolio replicates the Nifty or Sensex stocks in the same proportions. Some of the most well-known indices in India are BSE Sensex and NSE Nifty. One of the benefits of Index Funds is they deliver returns equal to the benchmark. However, there can be a small difference between the fund performance and the index.

It is famous as a tracking error, and the fund manager works towards reducing it. With weighted indices, they frequently stabilise the percentage of securities to make a presence in the benchmark.

Selecting them

Even though Index Funds are passive, investors still need to know how to select the best one for their investment. The following are a few parameters on which you can assess the funds for investments:

Investment horizon

The top Index Funds in India are suitable for individuals with a long-term investment horizon. It experiences too many fluctuations during the short run, averaging out in the long run if you stay invested for more than seven years to get returns ranging from 10% to 12%. Those who choose Index Funds should stick around at least for the said period to enable them to realise its full potential.

Low expense ratio and tracking error

The lower the expense ratio of the fund, the better the returns. The integrity solely depends on the tracking error. The lower it is, the better the fund’s integrity will be, and hence the desired performance will be delivered by the fund. A better indication of tracking error is the past performance of different types of Index Fund. If the fund’s performance is up to the mark, then the fund does all necessary activities to catch up with the set index.

Risk

Since Index Funds map an index, they are less prone to equity-related risks and market volatility. They are fantastic investment options during a market rally for earning decent returns. Remember to switch to actively managed funds during a market slump because they may lose higher value during the downturn. Having a mix of actively and passively managed funds, like the Index Fund in the portfolio, is advisable.

https://www.dspim.com/invest/mutual-fund-products/index-funds