Invest in Best Index funds
What is an Index Fund?
Index funds are passive form of investing. Index funds buy every stock in the same exact ratio as in an index like SENSEX or NIFTY etc., including all the big companies like HDFC, Reliance & TCS, and offer much lower expense ratio due to low turnover rates, fees and taxes.
Index funds are recommended for investors who understand the benefits of a diversified portfolio across assets.
Two main reasons to buy index funds
Index funds make sense for two reasons: Index funds are inexpensive and aren’t tied to the success of one single entity.
As per Warren Buffet “The trick is not to pick the right company or fund.. the trick is to essentially buy all the big companies through the S&P 500 and to do it consistently
Individual stocks also cost more to manage, which means managers take a larger chunk of your earnings”
Who should buy Index Funds?
If you don’t know too much about markets, the best way to invest your money right now is to put it in a cheap S&P 500 SPX fund as advised by Mark Cuban. The following should consider buying index funds:-
- Someone who doesn’t want to track markets
- Wants to eliminate all human error related to trading and errors in stock picking
- Keep costs down and grow a large corpus for retirement
- Believes that passive investment is better than active fund management.
- Replace your large cap funds with index funds for higher returns as large cap funds will only invest in top 100 companies as per SEBI categorization. You will get higher returns with Index funds due to its lower expense ratio.
How do Index Funds work?
Index funds track a benchmark such as NIFTY, its portfolio comprises of those 50 stocks that are present in Nifty, in the same proportions. An index is a group of securities that represent the market. The popular indices in stocks are BSE Sensex and NSE Nifty. Since, index funds come under passive investment strategy, wherein the fund manager buys/sells stocks as per the composition of the underlying benchmark. Here there is no standalone team of research analysts to identify opportunities and select investment opportunities
The fund manager here is only trying to replicate the index returns, but there is small difference in fund returns as compared to the index (positive or negative). This difference is called the tracking error. We should choose funds which have the least tracking error
Things to consider as an Investor
a. Risk tolerance
A person should choose funds based on their risk profile. It’s best to have a portfolio consisting of actively-managed funds and index funds.
b. Tracking Error
The small difference in returns between the index fund and the underlying is the tracking error.
Chose the fund with the minimum tracking error because smaller the error, the better is the performance of the fund.
c. Cost of investment
Index funds usually have an expense ratio of 0.5% or even less. In comparison, actively-managed funds have an expense ratio of 1.25% to 2.5%.
Between two index funds with the same returns, you should look at their expense ratio. Funds with lower expense ratio will have higher returns.
Best Index Funds to Invest in 2019
- UTI Nifty Fund
- ICICI Prudential Nifty Next 50 Index Fund
- HDFC Index Fund – Sensex Plan
- HDFC Index Fund – Nifty Plan
- SBI Nifty Index Fund.
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