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Index Fund Investment

Index Fund Investment: Should you avoid or invest?

by Holistic Leave a Comment | Filed Under: Investments

The investment world is full of thousands of options to invest in.

A new investor is merely aware of few funds or hot stocks, as they are discussed frequently in television and other social media channels.

To understand various different types of Mutual Funds, you should read this Comprehensive Guide to Mutual Fund Investments.

In this particular article, we will focus our discussion about Index Funds, which is one of the categories of Mutual Funds. After reading this article, you will understand Index Funds in greater detail and you will be able to make an informed decision on whether to invest in index funds or not!!

Let’s read on and discover Index Funds.

What are Index Funds?

Index funds, as the name suggests, invest in an index.

  • An index fund is basically a portfolio of stocks or bonds which mimics the performance of a financial market index, eg. Sensex, Nifty, etc.
  • Index funds follow a passive investment strategy.
  • Index funds have lower expenses and fees than actively managed funds.

These funds purchase all the stocks in the same weightage as in a particular index, such as Sensex, Nifty or other indexes.

Index funds are ideal for investors who are risk-averse and expect predictable returns. These are the passively managed funds. Index funds are not meant to outperform the market, but mimic the performance of the index.

Some examples of Index Funds are:

  • Reliance Index Fund – Sensex Plan
  • ICICI Pru Nifty Next 50 Index Fund
  • Franklin India Index Fund Nifty plan

Types of Index Mutual Funds in India

Sensex Index Funds

These index funds track BSE SENSEX as a benchmark index invest in 30 companies on BSE Sensex. These Types of Mutual Funds are backed by ETF’s (Exchange Traded Fund) traded on the exchange. ”

Nifty Index Funds

These index funds track NSE NIFTY 50 as a benchmark index invest in 50 companies on Nifty 50. These types of Mutual Funds are also backed by ETF’s (Exchange Traded Funds) traded on the exchange.

Nifty Junior Index Funds

These index funds track NSE NIFTY Junior 50 as benchmark index invest in 50 companies on NSE NIFTY Junior 50. These types of mutual funds are backed by ETF’s (Exchange Traded Funds) traded on the exchange.

There are many other types of index, such as G-sec index(tracks bond/commodity), Nifty Bank Index, Nifty PSU Bank Index (which tracks banking index) and International Indices such as NASDAQ-100, Hang-Seng Index, etc. (tracks an international index).

BSE SENSEX and NSE NIFTY 50 are the most popular indices in India.

Index Funds vs. ETFs: 10 Points comparison

Before we compare Index Funds and ETFs, let us understand, what is an ETF?

ETF stands for Exchange Traded Fund. ETF tracks the stock market index and trade like regular stocks on the exchange. Types of ETF are:

  • Index ETF,
  • Bond/Commodity ETF,
  • International ETF,
  • Gold ETF etc.

Out of the above listed ETFs, Index EFT works quite similar to Index Funds with a couple of differences highlighted in the table below:

Element of Comparison Index Funds ETF
How do they trade Index funds trade like Mutual Funds ETF trade like other stocks.
The need for Demat or Trading Account Index Fund does not need a Demat or Trading Account ETF requires a Demat and trading account.
Structure Index Funds keep a higher percentage of assets like cash and liquid securities. This leaves tracking errors, higher the error greater the deviation from Index returns. ETFs also hold some cash or equivalent for liquidity but it is much lesser than Index Funds. These track the Index more efficiently than Index Funds.
Basis for pricing NAV of the underlying asset. Demand and supply of the security/stocks in the market,
Trading Cost No transaction fees. But there will be Expense ratio charges. Higher transaction costs, along with expense ratio, annual fees, and brokerage charges.
Expense Ratio Comparatively High (min value is 0.1% and higher) Low (min value is 0.05%)
Initial investment SIP could start from Rs.500/- and onwards. And, Lumpsum investment may start from Rs. 5000/- No minimum investment
Settlement Time Minimum 1 to a maximum of 3 days. At least 2 days after a trade is placed.
Transaction Could buy and sell like any other Mutual Fund. Systematics transaction like SIP, STP, and SWP is also possible. ETFs are bought and sold at the exchange and need a Demat Account to execute transactions. Systematic investment cannot be done.
Liquidity No Liquidity risk. To liquidate an Index Fund, a redemption request can be made to the Fund House. The redemption amount will get credited to your bank account within a week’s time. High liquidity risk. There might be no buyers when the seller wants to sell ETF shares.
Or, the seller may have to sell the ETF units in a lower redemption amount!

Should you invest in Index Fund (in India)?

In short, the answer is NO. Below are the precise reasons why you should avoid investing in Index Funds:

1. Index Funds provides lesser flexibility

The fund manager merely follows the changes in Index; they do not have any flexibility to make any change in the portfolio, even though they found it to be necessary.

Whereas in actively managed funds, a Fund manager has the flexibility to rule out an unproductive fund or add any progressive fund in the portfolio whenever required or whenever he feels the right time to make changes.

Right changes at the right time ensure better returns on the investment.

But in Index funds, there is no flexibility to make such changes.

2. Index Funds generate average returns

Most of the active fund managers can easily beat the returns of index funds in the long run. Whereas in Index funds, Fund managers don’t play a significant role and also they have very restricted flexibility, as compared to their active counterparts; as discussed above.

The table given below lists some of the top Large Cap Funds; have a look at their 1-year returns! For Index Funds and ETFs the returns vary between 5%-6%.

Whereas for actively managed funds, such as Axis Bluechip Fund, the 1-year return is 17% -18%.

Notice a huge difference of 10% – 12%, by which the Index Funds fall short in their returns as compared to the other actively managed Large Cap Funds. There are various other actively managed Large Cap Funds such as Mirae Asset Emerging Bluechip Fund, SBI Bluechip Fund or ICICI Prudential Bluechip Fund which easily outperform the Index Fund in terms of generated Returns. Index Funds Average Returns

(Source:valueresearch As on 1st October 2019)

3. Index Funds sticks with the stock till they are kicked out

The stock price fluctuates every second in the share market. This fluctuation may not be a big deal for the big companies that are at the top ranking at the index, Sensex or Nifty.

However, at the bottom of the index table, there are some companies that drop out of the list, while many other companies manage to take a place in the list of top-30 or top-50, in the Sensex and Nifty index table.

As a result, the BSE/NSE periodically drops some companies from the Sensex/Nifty due to the company’s non-performance in the stock market.

Now, what does the index Fund manager will do?

They will hold on to the dropped companies until the last moment while they are in the index. While active fund managers sell them weeks or months, much before they are dropped from the index!

Also, the Index fund managers won’t start buying the newly added companies until the company is officially added to the index. Whereas, other active fund managers already have new and better stock in their hand, whenever they choose to have.

4. Index funds buy high and sell low

Till the time leading index (Sensex or Nifty) holds these stocks, you are stuck with these, even though you know that these are not going to perform!
Buy High Sell LowAnd, the companies which form the part of the index usually gain in market capitalization and therefore their stocks become expensive. The fund manager of the index fund has to buy more of such expensive stock to maintain the required weightage.

The stock will be sold only when the fund is no longer in index (as described in the above section), that is, when the cost would touch significantly LOW! As compared to the cost the stock was purchased.

Therefore, Index Funds are sort of an automatic procedure of buying high and selling low!

Some Advantages of Index Fund and its implications

  • Least expense ratio among the equity funds

      But the expense ratio is not the only factor which determines the quality or good returns of any fund
  • Diversified in all stocks of the underlying index

      Diversification is the common benefit of all Mutual Funds; its not unique only for Index Funds.
  • Least risky, since they merely replicate the index and are not dependent on the decision making of the fund managers.

      Fund managers of the Active Funds outperform the index funds. Index fund managers don’t play any significant role in the investment of the index fund.

Conclusion

You should avoid investing in Index Funds. You should make your financial goals and invest accordingly in other actively managed funds. For more details, you should read this article on, “How to Invest in Mutual Fund?”

If you have any further queries or your experience to share on Index Funds, feel free to post in the comment section below.

For your customized financial planning or investment-related advice, you should book your FREE consultation call by clicking the link below.

If you have any comments or questions, write them in the comment box below.

Or are you interested in creating a Comprehensive Financial Plan for your financial goals?

Skip the queue by registering for your 30 Minute FREE Financial Plan Consultation. Click the ‘Book Now’ button below.

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Jey S
Jey S
24. September, 2021.
I have been using Holistic Investment Planners for the last three years. Mr. Srinivasavaradhan answered all my questions and doubts very patiently during the first free consultation. I was able to clearly define my short-, medium- and long-term goals once I signed up for the comprehensive plan and got their investment plan suggestion to achieve my goals. They are very polite and highly professional whenever I contact them for any queries or make investments. They never pressurize you to invest on their recommended financial products. I would have been lost money by investing directly without their help since I do not have time and knowledge about different financial products. Risk planning is also done as part of financial planning. Truly, they are holistic planners when it comes to your financial planning. They help you to define your life goals, understand your financial resources and establish a plan to invest towards reaching those goals. They do review your plan as you progress to make sure that you are on correct path to achieve those goals. Kudos to the team and keep up the good work!!! I am happy that I found holistic investment planners for my financial planning and management.
aksaswadkar
aksaswadkar
24. September, 2021.
I was about to retire and really not understanding how to invest money to have financial freedom and fulfilling my goals. Was desperately searching on internet way out and fortunately came across Holistic Investment Planners. I read number of articles on their website and realized that this is the agency which I want and engaged their services for my retirement planning. It is an excellent experience to be associated with Holistic. Right from day one our interaction was fantastic and they gave me such a wonderful plan that I had never imagined. I am fortunate enough to be in the client list of Holistic. I have recommended Holistic to my friends as well.
Lionel Faber
Lionel Faber
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I've been availing their services for the past year. They are highly knowledgeable in the field and are very patient with all doubts and queries. Personalized financial planning is provided keeping your short term, medium term and long term goals in mind. They do not pressurize you to purchase schemes of their choice. They provide their input and suggestions and leave the decision up to you which shows their honesty and high principle.
Sridhar
Sridhar
8. September, 2021.
Financial planning brings peace in life. Holistic Investment have supported in arriving financial plan based on future goals. My investments are regular since then. They are professionals in their business, will recommend others.
Nitesh Agrawal
Nitesh Agrawal
6. September, 2021.
I have been using Holistic Investment Planners from last one year. The journey has been fantastic. Being a finance person myself I always thought we can look after and plan own finances also. However, due to lack of time and deciplain the things are not always as desired. After joining with Holistic Investment for the first time Icame to know the Financial goals and quantified them. Some dreams were unrealistic based on the earnings and savings so had a reality check. Also got the information and deciplain of investing on regular and more rewarding securities. I definetly suggest to use Holistic Investment Planners. They are professionals, available and hear youor full story before presenting plans. They are flexile in the sense if there are some urgent deviations required, they help to plan the same. For all professionals/individuals I would suggest using professional help of Holistic Investment Planners for best results in long term investment and financial goals achivements. Last advise will be to start early in your life. It really pays well to start in the beginning itself else the dreams needs to adjust :)
Swetha Vasanth
Swetha Vasanth
6. September, 2021.
This is my first year service with the Holistic Team and I would say that they are very much helpful in creating a financial plan and follow ups during the year. I would definitely suggest them if anyone who is willing to proceed with their savings professionally.
Joseph Mathias
Joseph Mathias
6. September, 2021.
I came to know about Holistic Investment Planners online while searching for different investment ideas. Once I contacted them the journey was very smooth. Mr. Ramalingam explained all the aspects of Financial planning in detail and it opened my mind. I realized how important it is to have a Financial planning. Mr. Rajan suggested all the requirements as per my goals and made a Investment plan keeping in mind of my goals. I started my Investment journey with them. I wish I had done it some years back then it would have been in a different level. Review meetings were held every six month to check the implementation of the plan and check the results as per the requirements and to check if any changes required. Overall it was a good experience with Holistic Investment team and would like to continue in the years to come.
Srinvas Kannan
Srinvas Kannan
30. July, 2021.
I came across Holistic investment planners almost 5-6 years back, but I did not have the trust since I had met a few of them who did not sound promising. Then I started investing through a financial advisor of my friend. After 4 years of investing the returns were very low. I was disappointed and started looking for financial advisors when I came across Holistic investment. I had a detailed discussion about my goals and the way they would approach achieving my goal before deciding to switch my investments to them. After a thorough analysis of my then existing portfolios, they suggested new ones and we zeroed-in on 6 schemes/funds where our investment would be split. I am glad I made the decision of switching over and taking Holistic planner's advise, my returns are handsome and I only wish I could have taken their help/advise 5 years back itself. Neverthless, I would like to recommend their services for investment and financial advise if someone is serious about their investments.
Shivaram Andiappan Selvaraj
Shivaram Andiappan Selvaraj
3. July, 2021.
I got a free first time consultation. I got my doubts resolved. They also gave additional advises for investment planning which was also useful.
Nellai B
Nellai B
26. June, 2021.
I have been associated with them for the past three years. They are very professional and polite in answering all our questions. I have complete trust in their suggestions. I strongly recommend for anyone. I am looking forward to have strong and successful association with them.
Google rating score: 4.4 of 5,
based on 61 reviews

Google Reviews

Jey S
Jey S
24. September, 2021.
I have been using Holistic Investment Planners for the last three years. Mr. Srinivasavaradhan answered all my questions and doubts very patiently during the first free consultation. I was able to clearly define my short-, medium- and long-term goals once I signed up for the comprehensive plan and got their investment plan suggestion to achieve my goals. They are very polite and highly professional whenever I contact them for any queries or make investments. They never pressurize you to invest on their recommended financial products. I would have been lost money by investing directly without their help since I do not have time and knowledge about different financial products. Risk planning is also done as part of financial planning. Truly, they are holistic planners when it comes to your financial planning. They help you to define your life goals, understand your financial resources and establish a plan to invest towards reaching those goals. They do review your plan as you progress to make sure that you are on correct path to achieve those goals. Kudos to the team and keep up the good work!!! I am happy that I found holistic investment planners for my financial planning and management.
aksaswadkar
aksaswadkar
24. September, 2021.
I was about to retire and really not understanding how to invest money to have financial freedom and fulfilling my goals. Was desperately searching on internet way out and fortunately came across Holistic Investment Planners. I read number of articles on their website and realized that this is the agency which I want and engaged their services for my retirement planning. It is an excellent experience to be associated with Holistic. Right from day one our interaction was fantastic and they gave me such a wonderful plan that I had never imagined. I am fortunate enough to be in the client list of Holistic. I have recommended Holistic to my friends as well.
Lionel Faber
Lionel Faber
16. September, 2021.
I've been availing their services for the past year. They are highly knowledgeable in the field and are very patient with all doubts and queries. Personalized financial planning is provided keeping your short term, medium term and long term goals in mind. They do not pressurize you to purchase schemes of their choice. They provide their input and suggestions and leave the decision up to you which shows their honesty and high principle.
Sridhar
Sridhar
8. September, 2021.
Financial planning brings peace in life. Holistic Investment have supported in arriving financial plan based on future goals. My investments are regular since then. They are professionals in their business, will recommend others.
Nitesh Agrawal
Nitesh Agrawal
6. September, 2021.
I have been using Holistic Investment Planners from last one year. The journey has been fantastic. Being a finance person myself I always thought we can look after and plan own finances also. However, due to lack of time and deciplain the things are not always as desired. After joining with Holistic Investment for the first time Icame to know the Financial goals and quantified them. Some dreams were unrealistic based on the earnings and savings so had a reality check. Also got the information and deciplain of investing on regular and more rewarding securities. I definetly suggest to use Holistic Investment Planners. They are professionals, available and hear youor full story before presenting plans. They are flexile in the sense if there are some urgent deviations required, they help to plan the same. For all professionals/individuals I would suggest using professional help of Holistic Investment Planners for best results in long term investment and financial goals achivements. Last advise will be to start early in your life. It really pays well to start in the beginning itself else the dreams needs to adjust :)
Swetha Vasanth
Swetha Vasanth
6. September, 2021.
This is my first year service with the Holistic Team and I would say that they are very much helpful in creating a financial plan and follow ups during the year. I would definitely suggest them if anyone who is willing to proceed with their savings professionally.
Joseph Mathias
Joseph Mathias
6. September, 2021.
I came to know about Holistic Investment Planners online while searching for different investment ideas. Once I contacted them the journey was very smooth. Mr. Ramalingam explained all the aspects of Financial planning in detail and it opened my mind. I realized how important it is to have a Financial planning. Mr. Rajan suggested all the requirements as per my goals and made a Investment plan keeping in mind of my goals. I started my Investment journey with them. I wish I had done it some years back then it would have been in a different level. Review meetings were held every six month to check the implementation of the plan and check the results as per the requirements and to check if any changes required. Overall it was a good experience with Holistic Investment team and would like to continue in the years to come.
Srinvas Kannan
Srinvas Kannan
30. July, 2021.
I came across Holistic investment planners almost 5-6 years back, but I did not have the trust since I had met a few of them who did not sound promising. Then I started investing through a financial advisor of my friend. After 4 years of investing the returns were very low. I was disappointed and started looking for financial advisors when I came across Holistic investment. I had a detailed discussion about my goals and the way they would approach achieving my goal before deciding to switch my investments to them. After a thorough analysis of my then existing portfolios, they suggested new ones and we zeroed-in on 6 schemes/funds where our investment would be split. I am glad I made the decision of switching over and taking Holistic planner's advise, my returns are handsome and I only wish I could have taken their help/advise 5 years back itself. Neverthless, I would like to recommend their services for investment and financial advise if someone is serious about their investments.
Shivaram Andiappan Selvaraj
Shivaram Andiappan Selvaraj
3. July, 2021.
I got a free first time consultation. I got my doubts resolved. They also gave additional advises for investment planning which was also useful.
Nellai B
Nellai B
26. June, 2021.
I have been associated with them for the past three years. They are very professional and polite in answering all our questions. I have complete trust in their suggestions. I strongly recommend for anyone. I am looking forward to have strong and successful association with them.
Google rating score: 4.4 of 5,
based on 61 reviews

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