How is index fund different from mutual funds?Asked
An index fund is a type of mutual fund which have a portfolio constructed to match the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). These replicate the performance of market benchmark.
Various characteristics of these funds are:
Index funds are different from mutual funds on the following parameters
Index funds is a category of mutual funds where the stocks in the fund are exactly same as the index from which they are derived. Index funds are passive funds which means that the portfolio of these funds is not changed very frequently until and unless there is some change in the index stocks.
Index funds offer very good diversification benefits as these funds have stocks from all the sectors and therefore represent entire economy of a country. These funds have very low expense ratios because of the low churn rate of the portfolio.
The risk involved in these funds is between moderate and high depending on the index. Investors who are more interested in the more modest objective of having an equity growth component in their portfolio, rather than the more aggressive objective of beating the equity market benchmark, would be better off investing in an index fund. This again does not mean that the NAV of an index fund will not decline in value. If the bench mark index goes down, then the NAV of the index fund too will go down. If the investor has a long enough horizon, then his investment will do well, in line with the overall market. Amongst index schemes, tracking error is a basis to select the better scheme. Lower the tracking error, the better it is.
Index fund is a type of mutual funds but differ from traditional schemes in terms of their passive strategy, expense ratios and risk involved.
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Some of the index funds trading in India are:
Index funds are mutual funds which are designed to track the returns of a whole market index such as Nifty, Sensex,etc . These funds purchase all the stocks in the same proportion as it is in a particular index.
Top performing index funds:
For index funds, whole index of stock market is used as an instrument of investment. Index funds buy all the stocks in a particular index in the same proportion as its respective index, thereby performing in coherence with the index.
Three options are available in India for investing in index fund:
Index funds are different from mutual fund mainly in three ways:
Index funds are popular in developed countries like US and are yet to make foothold in developing countries like India, as there are number of companies growing more than index.
Index funds are investment funds that are created to replicate the performance of market benchmark or index. Index funds behave like a market index tracker and invest in the same ratio as a particular index such as Nifty, Sensex, etc.
Some features of an index fund are:
Mutual funds vary from index funds on 3 main parameters: