One of the key advantages of mutual funds is that they are professionally managed by experienced fund managers. These managers buy into stocks or securities in line with the overall objective of the fund and the aspirations of its investors.

Actively managed funds, as they are called, can better manage their performance during periods of volatility in the market. This is especially true of aggressive growth funds that invest in small-cap stocks that do not have proven credentials but exhibit good growth potential in the long run.

On the flip side, however, active mutual funds have higher expense ratios which cut into the rate at which investors earn returns. Fund managers may also suffer from biases, which may influence their investment decisions. Given the dwindling returns, investors are looking for a better alternative.

Enter Index Fund

An Index is a group of securities that defines a particular market segment. In India, there are dedicated variants for both, the BSE Sensex or NSE Nifty. Unlike regular mutual funds, they do not seek to outperform the benchmark but match it. They are also called Exchange Traded Funds or Index Tracker Funds, for this reason.

Studies reveal that it is futile to try beating the benchmark every year. Warren Buffet himself has gone on record to say that investors are better off buying index funds as they “will do better on balance than what they will get if they to professionals”.

Advantages of Index Funds

  • Low risk
  • Index Funds are relatively low risk as they invest in the same bucket of stocks that are featured on the underlying index, which minimizes losses.

  • Low operating costs
  •  As they merely track the performance of the index, they do not need active management. The expense ratios for index funds are generally under 1%, while those of regular mutual funds are around 1.5%.

    This is a major bone of contention for investors wary about losing their earnings to high management fees. While mutual fund managers do take justifiable steps to increase returns, their consistency is temporary, in most cases.

  • Broad diversification
  • Index funds invest in the entire range of indexed securities as per their respective weightages. This lets investors benefit from a wide selection of assets across multiple industries and gives them the advantage of true portfolio diversification without additional costs.

The final verdict

As Index funds gain greater popularity in India, they may become the natural choice for investors. From the risk perspective, index funds can be a safe option, assuring steady returns. However, regular mutual funds thrive on taking calculated chances to give investors better than average returns, while index funds put a ceiling on it.

A smart investor would incorporate both, regular and indexed funds, in his arsenal to create wealth for the long term.

Explore our list of mutual funds here.

DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



Trending Articles

Popularly Searched Terms

Equity Linked Savings Scheme (ELSS)

Types of Mutual Fund

What is Debt Fund

What is Mutual Fund

What is an Index Fund

Latest Articles

mutual-funds
mutual-funds

How Systematic Investment Planning Can Help Meet Your Financial Goals?

Read More
Posted on 21 May 2020
mutual-funds
mutual-funds

What Are The Types Of Mutual Funds Based On Structure?

Read More
Posted on 08 May 2020
mutual-funds
mutual-funds

What are Global Mutual Funds?

Read More
Posted on 08 May 2020

Featured Articles

image abc-of-personal-money
abc-of-personal-money

Are Millennials Any Different When It Comes To Planning Financials?

Read More
Posted on 05 February 2020

Relevant Articles

image mutual-funds
mutual-funds

How Systematic Investment Planning Can Help Meet Your Financial Goals?

Read More
Posted on 21 May 2020
image stocks-and-securities
stocks-and-securities

What Is Dividend Yield In Stocks?

Read More
Posted on 14 May 2020
image mutual-funds
mutual-funds

What Are The Types Of Mutual Funds Based On Structure?

Read More
Posted on 08 May 2020