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What are Index Funds?

By
Shweta Prasanna Joshi
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Index Funds are a type of mutual funds, where the investment portfolio is designed to match market index benchmark. Such market index benchmark could be BSE index (Bombay Stock exchange), Nifty Index etc.

Advantages of Index fund

Low on risk

As these funds invest in the stocks or securities that are covered under their benchmark stock index, they are considered as more credit worthy. Also they are diversified as the stocks belong to various industries. Hence this diversification & credit worthiness will make these funds more worthy.

Steady Growth

Such types of funds are suitable for the cautious investors who are interested in steady income streams rather than capital appreciation. These funds assure to deliver the minimum desired returns of the conservative investors.

Lesser fees

As compared to non index fund, index fund charge lesser fees. This will benefit particularly when the fund outperforms.

Disadvantages of Index funds

No or little flexibility

Investment decisions are to be taken by adhering to specific policies & framework as devised for matching the fund to Index benchmark. Hence the Fund manager is restricted or has constraint of thinking in a box. This will lead to stereotype or peculiar investment decision making.

Restriction on earnings

Investors are not able to reap higher earnings from Index Funds where the Non Index funds are outperforming. This is because Index fund carry a constraint to match Index benchmark, which may or may not contain outperforming stocks.

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1 COMMENT

  1. I understand that these funds invest in the stocks or even in securities that are coming under their benchmark stock index or BMI. These funds are considered as more creditworthy and bring high value back to the investor. The risk involved might be less, but there will be good returns. Nice write author!

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