Index funds are a type of mutual funds that track the performance of a particular index in a market. It provides vast market exposure, low turnover and operating expenses as well.
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Index funds are funds that track the performance of a particular index in a market. It provides vast market exposure, low turnover and operating expenses as well. And this is because investing in an index fund is like investing in passive form of fund management.
Under an index, an investor buys the share of index fund and gets his/her share of securities in the portfolio under the funds. Now the securities that the investor gets are in the same proportion as present in the actual index and as the index witnesses a rise or fall in value, the same gets reflected in the fund’s share.
However, it is tough to achieve and match the actual index performance, simply because there are charges and fees that eat into the returns. Also, there’s always a difference between weighting of securities with the actual index, and the difference hence is called the tracking error.
There are several benefits attached to investing in index funds, a few are mentioned below for your reference:
Purchase and sale of index funds is quite economical when compared to dealing with the shares separately. So, when you buy index funds, you don’t have to actively get into which security to buy and go for and hence is slightly passive for of fund management. And because of the same the expense ratio is minimal, hence making it much affordable than other means of diversified fund schemes. Though there might be some sort of load attached or a minimum investment criterion as well, this might not be so good or suitable for a few investors.
Index funds always gives the investors more exposure to varied companies and the diversification offered is less volatile than the individual investment in securities. This gives the investor a broad exposure to market and its segments.
Sale and purchase of index funds are easier and faster than that of the shares otherwise. This is because every day, there a major exchange of index funds that happens in the markets.
Dividends paid by the underlying stocks, over the time accumulate to become a significant amount.
Index fund, over a time are said to gather returns from the expansive nature of market and are said to beat the average and usual mutual funds. That’s why index funds are considered one of the best ways to optimize returns on portfolio.
Therefore, it would be right to say that index funds are designed to perform decently well as the stated index. If the markets perform well, so will the index funds, except for some segments in the market when there might occur a little difference in stock picking
So, if you are looking at investing in a low cost fund investing strategy, want to keep fund management passive and simple, index fund will be the right choice of investment for you. And in case of any further clarification you must always seek help of fund managers and asset management companies like reliance mutual that have been in the market and are renowned names that can be trusted with a sound advice on mutual fund investments.
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