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How to Invest in Index Funds

by tavaga

Diversification between various asset classes is one of the most important principles of investing to diversify your risks. However, only a handful of retail investors are aware of diversification within the same class of assets. 

For instance, equity as an asset class comprises various investment vehicles such as Stocks, Mutual funds, and Index Funds. A proven way to diversify within your equity portfolio is by investing in shares from different sectors and companies. This is where Index funds are very helpful. 

Investing in low-cost index funds has long been considered one of the smartest investments you can make. It has historically been observed that index funds tend to outperform other mutual funds which top investment managers actively manage.

Here we’ve unleashed the ins and outs of Index Funds investing in India.

What are Index Funds?

Index Funds as the name suggests are mutual funds that mimic a particular Index. In a simple sense, it’s a passively managed fund that invests the corpus amount into the assets that the index comprises in the required proportion. 

To know it better, let’s take an example of the Nifty 50 Index Fund. The fund manager will invest the amount only into the top 50 companies of NSE at their weighted proportion into the Nifty Index. Now, this weight will be decided upon the company’s market capitalization. Thus in such a market capitalization-weighted index, companies with higher market capitalization value constitute a higher share in the index and vice-versa.

Talking about the returns, as Index funds are passively managed funds, it tries to match the returns offered by the particular index.

Benefits of Investing in Index Funds

Index Funds in India haven’t been explored much till now. But since the wave of passive investing has hit the investor class, Investing in Index Funds in India has seen a surge. It’s the following benefits that made this surge possible.

  1. Low associated Costs

As index funds follow a particular index, it doesn’t require research analysts and find managers to manage the fund which eventually decreases the cost associated with it.

  1. Tax benefits: 

The trade turnover of Index funds is low as compared to active funds which frequently react to market movements. Hence, it results in a low capital gain distribution charger to its unit holders.

  1. Benefits of Diversification: 

Investing in a generalized index gives you the benefit of a variety of factors that it includes. For example, a single index fund can hold securities ranging from pharma, Automobile, and FMCG to IT.

  1. Easy to manage: 

Managing an Index fund is nothing sort of switching the investments, rather it includes only balancing the portfolio as and when the index modifies periodically. This makes it easier to manage the index fund.

  1. Transparent Investing:

The fund managers are bounded within a limit of the securities in index funds, hence there’s no place for their know-how and bias for investing. This makes the working of the fund transparent for the investors to know where the funds are invested.

How to invest in Index Funds in India?

Investing into equities hasn’t remained a troublesome process like before, thanks to the Indian Fintech arena that brought a wave of investment fashion into the country. So now that you’ve made up your mind about investing in index funds and thinking about ‘How to invest in Index Funds?’, here’s a quick guide for you that’ll pave the path for index funds investing.

Though investing has taken the online route, offline investing is still there and it’s upon the investor’s discretion to choose either of them. Here we’ve mentioned both the forms in detail.

Online Investing 

After choosing your risk appetite, look out for a fund that aligns with your investing goal and follow the below-mentioned steps to start investing.

  1. Sign up for a mutual fund investment platform and open an account there.
  1. Fill in all the personal details and finish the e-KYC procedures to get ahead.
  1. Authenticate your account by filling in the OTP via SMS or E-mail and give PAN details.
  1. Now that your account is set up, choose the fund in which you decided to invest in.
  1. Select the fund and the amount you wanted to invest in and transfer such the required amount.

Beginner’s TIP: If you want to begin a SIP, you can choose the standing instruction with your bank to automate monthly SIPs.

Offline Investing: 

In offline investing, you’ll need to do paperwork with your investing agent along with the following steps: 

  1. Carefully fill in all the KYC and application forms.
  1. Read all the documents carefully and know all the conditions associated beforehand.
  1.  Link your DEMAT account (if you already have one) or apply to open a new DEMAT account to collect the securities. 
  1. Choose the fund or funds you want to invest in all also the mode of investment, whether a one-time investment or monthly SIP.
  1. After completing formalities, make the payment through your convenient medium.

The Bottom Line

As a derived asset class, Index funds are great options for passive investors yet, one should consider a few things regarding it. For example, your investment objective, time frame for investing, expense ratio, tracking errors between the returns generated and benchmark index, etc. should be looked upon before investing in any fund.

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