Index Funds and How to Profit from them

It is a growing concern among fund managers to generate optimal returns when it comes to stock mutual funds. Before you decide to invest in index funds, please tell us about them.It is a type of mutual fund that is known to purchase similar types of stocks relating to a particular market index. What it means is that the funds are bound to perform well against the benchmark index they have set.

Index funds are known to follow a specific market segment and fall under the category of passive fund management. Under this module, the securities are traded independently depending upon the underlying benchmark. The returns more or less align with the benchmark, except for a small error referred to as the tracking error. The responsibility lies with the fund manager to track down this error as much as possible.

The benefits of investing in index funds

Below are mentioned a series of benefits associated with investing in index funds.

  • Low fees: as the index fund is known to mimic the underlying benchmark, you no longer require a team of research analysts to help the fund managers choose the right stock. even if there is no active trading of stocks. This series of factors leads to a low managing cost of an index fund.
  • Broader exposure in the market: When you invest money in the market, it is similar to that of an index, which means that the portfolio is diversified across all stocks. Hence, it is possible for an investor to seize a larger investment via the help of a single fund. An example is that if you are planning to invest in the Nifty fund index, then you will have investment exposure to 50 odd stocks spread across 13 sectors. This may range from pharmacy to financial services.
  • No form of bias investing: Index funds are known to follow an automated regulatory form of investment method. The fund manager has a mandate of money that he is planning to invest. This eliminates human bias during the course of investment.
  • Tax benefits when you are investing in index funds- By investing in index mutual funds you are bound to gain tax benefits. As index funds are passively managed a low turnover is obtained. It relates to free trades that is placed by a manager in a given year. Fewer trades would result in lower capital gains that is passed on to the unit holders.
  • Easy to manage- the fund managers do not have to worry themselves on how the stocks are performing in the market. The index funds are easy to manage. Just a fund manager has to re- balance as they need to manage the fund properly.

In a nutshell you should invest in index mutual funds depending upon your risk appetite goals, and investment horizon. This is a type of investment which suits people who are less aversive of taking risks. These funds do not require extensive degree of research.

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