Everything You Should Know About Index Mutual Funds Before Investing | Index Mutual Funds

Diversification is crucial for creating a profitable investing portfolio, as we all know. Investors sometimes take into account several asset classes, such as gold, debt, equities, etc., to diversify their portfolio. To lessen the total investment risk, they anticipate greater diversification within these asset groups. When it comes to equities Mutual Funds, the fund managers assemble a variety of reliable stocks from businesses across a range of industries and market capitalizations to create the scheme portfolio.

Index mutual funds use a comparable approach to investing. Let's examine what index funds are, how they function, their characteristics and advantages, and the things to think about before investing.

What are Index Mutual Funds?

A Mutual Fund that invests primarily in underlying stocks that make up a benchmark, such as the NIFTY 50 or the SENSEX 100, is known as an Index Mutual Fund. These funds, without altering the composition, invest a minimum of 95 percent of their total assets in the equities and equity-related securities of corporations listed under a certain Index.

 Since they are passively Managed Funds, the portfolio manager makes sure that the securities in the underlying index continue to be represented in the composition of the Index Funds.

Instead of attempting to surpass their benchmark like other Mutual Funds, Index Funds strive to produce returns that are comparable to the benchmark they are based on.

Also read:- How To Start An Investment Fund?

Understanding how Index Mutual Funds work

Let's say that an Index Fund in question uses the CNX NIFTY (NIFTY 50) as its base benchmark. All 50 equities from the index will be included in the portfolio of such an Index Fund in the same distribution as they are listed on the Index. An Index may include stock and products connected to equity, or it may also include fixed income securities. These indices are known as bond indices of fixed income.

In active funds, the portfolio is actively managed by the fund managers, who also make decisions. They are there to make sure the fund produces returns that beat the benchmark and surpass the competition.

However, passively managed funds, such as Index Funds, do not aim to beat the performance of their underlying index. In contrast, Index Funds use a passive investment approach and are intended to closely resemble their benchmark and provide comparable returns. However, tracking failures might affect the returns produced by Index Funds.

Also read:- Index Funds - Definition, Risk and Returns 

Index Mutual Funds are ideal for

Investors in Mutual Funds must first understand the risks Involved with the strategy before deciding whether their risk tolerance permits them to accept these risks. Additionally, it's critical to confirm that the scheme's investing goal and the investor's goal are compatible. Investment risk is quite high for Index Funds that use equities as their underlying assets. In order to comprehend the volatility aspect, investors may even look at the riskometer.

Investors with very high risk tolerance and extended Investment horizons can think about including Index Funds into their mutual fund portfolio. Investors occasionally struggle with the idea that a mutual fund scheme's performance are influenced by investor emotions.

They don't like the idea that the portfolio composition might be changed by the fund managers without their awareness, and that they might wind up choosing to invest in stocks that are too risky for their portfolios. Since Index Funds only own equities that are included in the underlying Index, that is not possible with them. 

The fund management only makes adjustments to the portfolio if the index's stock composition changes, in order to ensure that tracking mistakes are prevented. Index Funds may be preferred by investors who are not interested in investing in Mutual Funds that aim to outperform the benchmark and are content with a strategy that seeks to provide returns that are similar to the benchmark.

Also read:- Difference Between Shares and Mutual Funds: Which is Better?

Things you should consider before investing in Index Mutual Funds

Investors should make sure that they have a long-term investment perspective before Investing in Index Mutual Funds. It is advised for the investor to hold onto their investment for the long term in order to enable an equity linked plan, such as an Index Fund, to perform to its maximum potential. Equity investments are continually impacted by market swings, and short-term investing in equity-oriented index funds may not be a good idea. Equity investments may potentially provide negative returns. Investors must have patience and continue to invest in Index Funds with a long term investing time horizon in order to see their assets steadily develop and multiply.

Investors may use Index Funds to pursue their long-term financial goals since they are more likely to perform well in the long run. If building wealth is what you're after, Index Funds can give your portfolio the boost it needs. Even Index Funds may be taken into consideration for objectives like retirement planning. It is well recognised that Index Funds have a high risk-return tradeoff. Despite the extremely high investment risk, there is a chance that the programme may enable investors to see some capital growth in the long run.

Index Funds, as was already said, are intended to mimic the performance of the Index. This largely leaves out mistakes, biases, and other investing risks that could be influenced by human emotions. Investors are urged to diversify their portfolio with other actively managed mutual funds in addition to Index Funds, which may help them achieve their financial objectives. It might not be wise to only rely on Index Funds to help you reach your financial objectives. A lucrative portfolio may be built by investors by finding the correct mix of active and passive funds.

Index Fund returns are passively tracked and are therefore susceptible to tracking mistakes. An Index Fund's returns may differ from the benchmark's returns. The actual returns will inevitably differ from the benchmark if the Index Fund has a lot of tracking problems. As a result, it is advisable to think about Index Funds with a low history of tracking errors. Low tracking error Index Funds may be able to produce returns that are comparable to their underlying benchmark.

It is hard to discuss index mutual fund investing without mentioning the expense ratio. In contrast to actively managed funds, which have a comparatively high expense ratio, index funds are seen to be a more affordable form of investment. Index funds use a passive investment method to create returns. For the fund to make money, the fund manager does not necessarily need to come up with an investing plan. Index funds attempt to produce returns that are similar to those of their underlying benchmark. Index mutual funds have a low expense ratio since the management isn't very involved. Do keep in mind that if two index funds are tracking the same index as their benchmark, their returns will likely be identical. Consequently, in such a situation, a person may think about the index fund with a reduced fee ratio.

Also read:- What are Mutual Funds? How Mutual Funds Work

What are the different ways to invest in Index Mutual Funds?

An investor can invest in index mutual funds, like the majority of mutual fund schemes, either by making a lump-sum investment or by taking into account the Systematic Investment Plan. An investor will often make a lump sum investment at the start of the investing cycle. This is the total investment amount that the investor desires to put into the index fund in anticipation of possible capital growth. A lump-sum investment could be preferred by people who have idle surplus wealth, just inherited money from family members, or have an old investment policy that has reached maturity. It could also be liked by people with seasonal incomes and irregular income. However, paid people with a reliable monthly income stream can think about using the SIP.

The Systematic Investment Plan, or SIP for short, is perhaps the simplest and least complicated approach to invest in index funds. To begin their investing adventure, a person only has to finish all pre-investment paperwork and confirm that they are KYC compliant. It is easy to invest in index funds through a SIP. Investors must choose a sum that they intend to invest on a regular basis. SIPs can be conducted on a weekly, monthly, quarterly, biennial, or yearly basis. The majority of people, however, like the monthly SIP option since it allows them to set aside and invest a certain amount each month. The planned SIP sum is deducted from the investor's savings account every month on the established day once the amount is decided, the SIP date is set, and transactions are automated. Investors can use the funds to purchase units. The unit allocation occurs in proportion to the SIP payment and the fund's current NAV (Net Asset Value).

Here’s an example of how you can invest in an index fund via the Axis Mutual Fund website –

• Visit www.axismf.com
• If this is your first time visiting Axis Mutual Fund, click the "New Investor" icon to create an account.
• Then, hover on the ‘All Schemes’ tab and when you get a dropdown, click on ‘Equity’
• Let us assume you wish to invest in ‘Axis Nifty 100 Index Fund Regular Growth’
• Scroll and search for ‘Axis Nifty 100 Index Fund Regular Growth’ and click on the scheme
• Click on the ‘Start A SIP’
• Enter the SIP sum, SIP date, SIP tenure, and Plan (Growth/Dividend)

You recently invested in an index mutual fund for the first time.

Investors should speak with their financial advisor before making any form of mutual fund investment. All the hazards connected to the investments they're going to undertake must be thoroughly understood by them. Furthermore, it's important to realise that the mutual fund scheme's historical gains could not continue in the future. Mutual fund investment returns are never guaranteed and are always subject to market risks.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Disclaimer:

Axis Mutual Fund is launching this initiative to raise investor awareness and education. Investors must complete the KYC process once. For additional information, please visit www.axismf.com or email customerservice@axismf.com. Investors should only transact with registered Mutual Funds, information about which may be found in the Intermediaries/Market Infrastructure Institutions section of www.sebi.gov.in. Investors can contact us by phone at 1800 221 322 or by email at customerservice@axismf.com, or they can file a complaint using the SEBI Scores system at https://scores.gov.in.