An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio that mimics an index, such the NSE Nifty, BSE Sensex etc. Index funds are passively managed which means that the fund manager invests in the same securities as present in the underlying index in the same proportion without changing the portfolio composition. An index mutual fund is said to provide broad market exposure with low operating expenses and returns comparable to the index that they track. An index funds follows their benchmark index.
Advantages Of Index Mutual Funds
1. Cost Efficient:
Since index funds are passively managed, the expense ratio is very less as compared to the actively managed funds. While an actively managed fund may charge you anything between 1-2% as expense ratio, an index fund would typically charge you between 0.20% to 0.50%. At face value, the cost difference may seem small but in the long run, the difference can be as large as 15% of your net returns.
Hence an index fund constitutes of top companies in terms of market capitalization as benchmark. It means leading market players across the sectors would be a part of the benchmark index. The auto diversification allows the investor to reduce risk from staying invested in a particular stock or a sector.
3. No errors:
Since the allocation of assets in case of index funds is not depends on the decision of fund manager, there is no chance of error in asset allocation or poor management.