(Last Updated: October 31, 2018)
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What are Index Funds: meaning, advantages, review, Taxation

  • Mutual funds have gained a lot of traction in the recent years. In fact, they have become quite popular investment tool in India. Index funds look to be a good choice. I haven't tried them but would like to do so.

  • Hi, thanks for such useful details. Index funds seem to be a good investment tool to grow money in the long run. Basically, index funds replicate the index returns and are a good example of passive investing. Right!
    I have heard that the cost in index funds is relatively lower. Is it true and if so how? Also, there are chances of tracking errors in index funds. Is it so actually?

  • The biggest question is that why should one buy Index Funds and not the ETF ? The expense ratio of ETF is much lower and index anyways dont need that much active management since the stock picking simulates the index only ?

  • Yes the expense ratio of index fund is very low as compared to actively managed funds.
    Reason being, in index fund fund manager only has to replicate the index and no other research is required. Fund manager has very little role to play.

    Yes tracking error is also there, reason is the fund cannot replicate exactly the portfolio of index due to size of investments in market is too big whereas investment size in fund is very low.

  • Well,

    I personally think that if you have to invest in Index only, then better go with Index ETFs. They are more real time have and lesser expense ratio. But again, thats just me.

  • Hi Jignesh, I agree with you. Although Index funds are getting popular. But, if given a choice, I shall also prefer to go with Exchange traded funds (ETFs). The lesser expense ratio is surely an attractive point to make the correct decision.

  • @prateek Hi, What do you mean by expense ratio? What is the importance of expense ratio while investing in mutual funds? I have read this term at so many places. Can you please explain in simple words. I am not from a financial background. But, I am very interested in mutual funds. Trying to gather knowledge from different places.

  • Hi Ritesh,

    In one line, Expense Ratio is the bread and butter for fund manager. It’s the charges you pay to Asset Management Company i.e. fund house to manage the fund portfolio. Fund houses manage all their expenses through earning from expense ratio.

  • @prateek Lower expense ratio is anyways better from investor's point of view, I suppose. A lot of mutual funds options around, one tends to get confused which one to invest in for good returns. Index funds seem ok but I would rather go for ETFs only.

  • I have no reservations with ETF. Just keep in mind to invest/purchase those ETF which are trading in substantial volume.

  • @prateek Index funds perform in tandem with a tracking index. The low expense ratio is definitely an attraction for investors. Direct mutual fund plans and regular plans have higher expense ratio, I suppose. Is this correct? But, then actively managed mutual funds tend to give better returns than Index funds. So, lower expense ratio can't be the sole criteria to invest in a particular asset class. What say, do you agree to it? It's the funds or stock picking sills that actually matter.

  • @jatinderchd Hi, Index funds deliver returns more or less equal to the benchmark. Is it true actually? While actively managed mutual funds can give higher returns. If yes, which one is better overall, active funds or passive funds? Please clarify a bit on this.

  • @ishu
    That's sure that actively managed funds give better returns and come with downside protection.
    But, if you go for long run say 10-15 years, Index Funds outperform actively managed funds.
    Not only the expense ratio but turn around ratio for index funds is also quite low..

  • @sudheer

    said in What are Index Funds: meaning, advantages, review, Taxation:

    Index funds deliver returns more or less equal to the benchmark.

    Returns from Index Funds cannot be more than returns of benchmark index. Its always quite less due to tracking error and expense ratio.

    While actively managed mutual funds can give higher returns. If yes, which one is better overall, active funds or passive funds?

    Its more of a personal choice to go for actively managed funds or index funds.
    Like for me, I change my stance from actively managed funds to index funds, slowly over a period of time, by knowing more and more about them.

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