Index funds

Index funds: Index funds are a sort of mutual funds having a portfolio that tracks an underlying index in the market. As the name suggests, an index fund copies the index. A nifty index plan reflects the stock by which the nifty forms part of i.e. the 5o underlying shares. This index fund invests in all the 50 stocks forming part of the nifty in the same proportion as that of the nifty. The manager of the fund does not actively choose the securities in which the fund will be invested. They are passively managed by the index as a replication of itself.

Popularity in India:

Index funds are more popular among the investors in developed financial markets such as US, UK and the European markets. In fact, the biggest fund in the US market is an index fund that tracks the S&P Index while less than 1% of the overall investments in equity mutual funds in India are index funds.

The main reason for this is the sentiment of the investors that in a growing market like India, there are many companies that do not become a part of the index but outperforms the index bearing returns. Thus they see the actively managed funds as more attractive than those that invest exactly as same as the index.

Warrant buffet on Index funds:

They are becoming more popular after investors like warren buffet has backed the decision of an average investor to put his money in index funds for better retirement plans. In fact buffet himself told his wife to invest the money in index funds after his death.

Merits of Index funds:

1. Low operating costs:

Index funds involve lower operating costs unlike in the case of actively managed mutual funds where the fund managing company requires to incur a lot of costs in terms of services of research analysts and the experts consultation, market tracking tools etc., These costs are charged to the investors by the mutual fund manager. Since, index funds simply invest in the stocks of the underlying index; they do not involve these operating costs, eventually resulting in lower operating costs to the investor.

2. No dependency on fund managers:

In case of actively managed funds, the fund managers are entrusted to allocate the funds pooled in various securities to maximize the fund return. At times, they may pick the bad stocks, out time in their decisions, ignore certain trends. Their behaviors are not guaranteed to be wise always, after all they are humans. But there is no place for such thing to worry in index funds.

3. Good for beginners, Amateur investors:

Index funds are good in long run for those having no basic knowledge of the market. Instead of depending on fund managers and investment consultants, one can simply park his money in index funds to earn as the market grows over time.

Few popular index funds in India: Fund name
1 HDFC Index Fund-Sensex(G)
2 UTI Nifty Index Fund(G)
3 UTI Nifty Index Fund(D)
4 SBI Nifty Index Fund-Reg(D)
5 IDFC Nifty Fund-Reg(G)
6 Franklin India Index Fund-NSE Nifty(D)
7 Aditya Birla SL Index Fund(DR)
8 Franklin India Index Fund-NSE Nifty(G)
9 IDFC Nifty Fund-Reg(D)
10 Reliance Index Fund - Nifty Plan(G)
11 ICICI Pru Nifty Index Fund(G)
12 Tata Index Fund-Nifty Plan(G)
13 HDFC Index Fund-Nifty(G)

Index Funds

Index funds in India have not yet taken the momentum owing to the fact that actively managed funds give better results than the index based schemes. But this will not be the case forever. As a growing market, in the long run, Index funds offer better and consistent results in the future. These are ideal for planninf a financially independent retirement life.