Index mutual funds facilitating investment in particular equity Indices
Ever thought of the indices prevailing in the equity market? S&P 500 (Standard & Poor’s Index 500), BSE 30 Index, Sensex, Nifty, etc. The Index funds aim to replicate the profit of the various indices. These are the most common indices we hear in our daily lives. This means that the Index Fund invests in exactly the same proportion of the equity shares as they are listed in the indices. The Index funds do not alter the order and proportion of the shares and thus earns the profit accordingly.There is a different proportion of each share in the indices is different. For example, if Reliance is sharing 10% in the index, then Index Fund will also invest only 10% of the total amount in Reliance Industries.
There are some indexing methods followed in order to optimize the investments of the investors.
- Traditional Indexing: Index mutual funds of this category follow a fundamental and simple rule of indexing, i.e., replicate the indices exactly and in the same proportion. Alteration in the Index Fund takes place only when any company enters or exits the indices. Other than that, the traditional Index mutual funds give consistent and moderate results throughout.
- Synthetic Indexing: The index funds lying under this category are a combination of indexed equity and plus an investment in low-risk bonds. The Index funds here provide a greater return on one hand and secure investments on the other. Synthetic indexing can provide you with better tax-benefits as compared to traditional investing.
- Enhanced Indexing: This method of indexing in Index mutual funds online facilitate the alterations in the funds by using different methods like including customized indexes (instead of relying on commercial indexes), trading strategies, exclusion rules, and timing strategies, etc. Using these techniques, the Index mutual fund enhances the use of active management. By active management, one means actively altering the funds and not simply reciprocating the indices. To make significant changes in the investment strategies and to earn maximum profit, is the prime motto of the Index funds falling under this category.
Benefits of having invested in Index Mutual Funds
There can be following benefits of investing through the index mutual funds:
- Manageable: The index funds are very simple and easy to manage. Once, you have to understand that in which index you aim to invest. The equity funds in each index vary depending on their size, capital invested, good traded, etc. So, if you know in which mutual fund schemes to invest and how much then, three-fourth of your task is completed. The one-fourth remaining is to invest the money and track its performance regularly.
- Subservient turnover: In Index funds, the turnover is very less or negligible. Turnover means buying and selling of securities. As in the Index funds, the investment is done based on the proportion in which the companies have been listed on the indices. There are chances of changes in the Index funds only when any company enters or exits the indices in case of simple indexing and enhancing methods used in case of enhanced indexing.
- Style drift is zeroed: Unlike other funds, Index funds do not allow style-drift. Style drift is the change in the ratio of investment in diversified equity fund in order to maximize profit. This means increasing the investment in the equities offering greater returns, which will increase the risk factor manifolds. But, such changes are not possible in Index mutual funds thus, putting a check on style drift.
- Minimum-risk involved: As the Index funds are properly diversified, the investment is no doubt secure. The investment is not centered around one or two equity companies and thus, facilitating diversification of the funds and at the same time security.