How to invest in index funds?
Individuals’ interest in index funds is increasing due to an overarching desire to compound and capitalize on wealth.
Amid constant volatility in markets, it has become imperative to explore investment ways that dilute any potential risks of losing on high-return investments.
This is why people are incredibly inclined toward building different buckets instead of leaving all eggs in a single basket. In investment terms, diversifying the portfolio by investing in different equities and sectors is one of the best techniques to evade market risks.
It is where investment in index funds emerges as a market dominator in the current Indian scenario.
What are Index funds?
Index funds work differently from active funds. These funds are appropriate for those wishing to evade risk and diversify investment. One can only manage the investments passively.
It implies that a person cannot invest directly in an index but through mutual funds called “Index Funds.” A manager or investor invests in the same equities as present in the index.
The market index leverages a company’s market capitalization to determine the total weightage of securities in the index. The total value of the company shares is equivalent to the number of outstanding shares.
As per Economic Times, “Since February 2020, the number of index funds has surged 144% and the assets managed by these investors grew by 590%”.
As a part of the ongoing research by the Economic Times, “The number of index funds grew from 32 in February to 78 in July 2020”. ETF draws the investor’s interest during this phase.
Who should invest in index funds?
Investments in index funds are profitable only for a selective bunch. If you meet the below investment behavior, index funds are just right for you:
- You wish to evade any risks associated with investment/slash investment risks
- You want to diversify your portfolio by starting and investing a low amount
- You prefer to invest only a fixed amount in a particular index fund
- You would like to invest in multiple investment forms – like real estate, gold, equities
Early savings help in child’s future
How to invest in index funds?
Index Funds are a type of investment vehicle like mutual funds and exchange-traded funds that help achieve results on specific indexes. Here is how you can invest in index funds:
1. Figure out your investment goals
Before investing, it is important to ensure clarity over the present and future financial goals.
- When do you want to retire?
- How long till you achieve your financial goals?
- What do your risk appetite and budget look like?
2. Pick one index to invest in
Index Funds, apart from helping diversify the investment, track broad sectors like large capitals and emerging markets. Different index types serve different purposes.
While deciding on the index to invest in, analyze the below parameter:
- Which industry do you share knowledge in and is growing lately?
- How much is your risk tolerance?
- What are the company size and market capitalization?
- What index fund would you find comfortable investing in (stocks, bonds, or commodities)?
Highlighting and improvising on these parameters will help you choose the right index fund. It will help build a growth foundation.
3. Decide the index funds to invest in
Each fund and company has different marketing capital, growth potential, and shares available to invest in. The best research method is by researching Asset Under Management (AUM).
It is the total investment value that an expert manages on the client’s behalf. Analyze the AUM index of a given fund and the ease of trading.
Here are some best index funds for 2022:
- IDBI Nifty Junior Index Fund Growth
- ICICI Prudential Nifty 50 Index Plan Direct-Growth
- UTI Nifty Next 50 Index Fund Direct-Growth
As per ClearTax – “IDBI Nifty Junior Index Fund Direct Plan-Growth, is one of the most profitable index funds in India.”
Index funds companies can vary in their short and long-term costs.
4. Sign up for a brokerage account
After signing up for a brokerage account, utilize the above points to figure out the best index funds to invest in. Here, an investment expert may help you meet the purpose according to your financial goals.
In the initial stage, having expert backing works well. An expert can help you develop an investment strategy that aligns with personalized financial goals. It makes investment in index funds a smooth journey.
5. Manage investments cautiously
It is important to manage and check potential opportunities for growth. Start with small investments and set up automatic monthly deductions. Monitor the fluctuations and returns throughout the year. Modify the strategy if the market demands.
While Index funds are a great way to start investing, it’s good to remember no market is without risks.
What are the benefits of investing in index funds in India?
Index funds offer benefits such as broad market exposure, diversification, low costs, and simplicity. They track a specific index, like the Nifty 50 or BSE Sensex, providing exposure to multiple stocks. Their passive nature keeps costs lower compared to actively managed funds. Index funds are easy to understand and suitable for long-term investors seeking market returns.
How can I choose the right index fund in India?
Consider factors like the index being tracked, fund performance, expense ratio, and fund house reputation. Look for funds with a low tracking error and a consistent track record. Evaluate the fund’s size and liquidity. Read the scheme’s offer documents, prospectus, and seek expert opinions to make an informed decision.
What are the risks associated with investing in index funds in India?
Index funds are subject to market risks and fluctuations. Their returns are influenced by the performance of the underlying index. If the index experiences a downturn, the fund’s value will also decline. Additionally, tracking errors may occur, resulting in deviations from the index’s performance. It’s important to understand these risks and have a long-term investment horizon when investing in index funds.
Consult an expert advisor to get the right plan for you