WHAT IS AN INDEX FUND?

 INDEX FUND: In today's article, I will talk about index funds whatever knowledge I have on that topic. So, let's start, so index funds are a type of mutual funds, the main difference between mutual funds & index funds is that mutual funds are actively managed by the fund managers & index funds are passively managed, which means no one is going to pick up the stocks for you. 

WHAT IS AN INDEX FUND?

First of all, let's understand what is an index? In the financial world, indexes are created to track items such as publicly traded stocks, bonds, etc. Indexes typically measure the performance of a basket of securities intended to replicate a certain area of the market and index funds are trying to copy an index like NSC Nifty, BSC Sensex, etc. 

HOW DO INDEX FUNDS WORK BASICALLY?

Suppose, an index fund is tracking the BSC Sensex, this fund will, therefore, have 30 stocks in its portfolio in similar proportions. An index can include equity & equity-related instruments along with bonds. The index fund ensures that it invests in all the securities that the index tracks.

WHO SHOULD INVEST IN AN INDEX FUND?

Anyone who has less experience in the field of the stock market, who doesn't want to take a high risk, who wants safety in the stock market, then index funds for those people. Because here, you aren't investing directly in stocks or in a risky mutual fund, you invest in an index fund that imitates an index, under an index, there is a variety of stocks presence. Diversification is a key element of a good investment portfolio. Investors try to spread their funds across various asset classes like equity, bonds, debt, real estate, gold, etc to minimize risk. In equity investing, a known method of reducing risks is diversifying your equity portfolio by investing in shares of companies from different sectors. This is where the index funds step in. In an index fund, if you invest for a long period of time(more than 10 yrs) then you can expect around 12-13% return on your investment. This is not an outstanding return but this is not as cheap as FD. You can increase your return 15-18% by just going more depth into the stocks.

EXPENSE RATIO: 

The expense ratio is a small percentage of the fund's total asset charged by the fund house towards fund management services. One of the biggest advantages of an index fund is its low expense ratio, since the fund is passively managed, there is no need to create an investment strategy or a research team to find stocks for investing. This brings the fund management cost down leading to a lower expense ratio. The expense ratio is around 0.1 to 0.2 percent, sometimes even less than that.

TAXES: 

I have talked about taxes before in the article" what is a mutual fund", I repost it again,

Now let's talk about the taxes that are levied on you when you invest in index mutual funds, basically, you have long-term capital gains and short-term capital gains. First of all capital gains means, let's say you invest 100000 rupees in mutual funds and you earn 10000 rupees, then this 10k rupees is your capital gains, so if your capital gains are less than 100000 rupees then you don't have to pay any taxes but if your capital gains are more than 100000 rupees then you have two types of different taxes, first one is if you hold up your mutual fund for less than 12 months then you will be levied about 15% taxes and if you hold up your mutual fund for more than 12 months and your capital gains are more than 100000 rupees then you will be levied about 10% taxes. So this is all about taxes that are levied on mutual funds.

HOW TO INVEST IN AN INDEX FUND?

You cannot invest in an index( NIFTY50, SENSEX30, NIFTY100, etc) directly, you have to invest in an ETF ( exchange-traded fund).

So, this is a little bit of knowledge about index funds, I hope you got to learn something, tnx for reading completely😊