What if you wanted to own a portfolio of mutual funds capable of generating returns almost in line with the stock market? Welcome to the world of passive funds! Investing in index funds is the solution because they are passive funds with underlying stocks as represented in the index it tracks. This means that by investing in an index fund, you end up owning stocks in the same proportion as those held in the index.
By investing in index funds, you essentially stay away from funds managed by a fund manager. The role of a fund manager in the selection of a stock or industry and even the allocation between them is completely absent from index funds.
The returns of an index fund reflect the returns generated by the index tracked by the fund. In a way, index funds can be a good place to start for newbies in building a strong portfolio of mutual funds.
But remember that active funds which have a fund manager to manage the program may outperform over the long term, however an underperformance of these active funds cannot be ruled out either.
Here we take a look at some of the NSE indices that are available to investors through index mutual funds.
Nifty 50 Fund: The most common and popular Nifty Index is the Nifty 50 Index, which is a diversified stock index of 50 representing 13 sectors of the economy. Index funds that follow Nifty 50 will have the same set of stocks as Nifty 50 in the same allocation and exposure. You can choose a Nifty 50 index fund from any fund house and start investing in it.
Nifty 50 Equal Weight Index Fund: Then there is the Nifty 50 Equal Weight index which represents an alternative weighting strategy to its parent index based on market capitalization, the Nifty 50 index. The index includes the same companies as its parent index, however, weighted equally. The Nifty Next 50 index represents 50 Nifty 100 companies after excluding the Nifty 50 companies.
Other index fundsLikewise, the Nifty Midcap 150 index captures movement and is a benchmark in the midcap segment of the market and the Smallcap 50 index intends to measure the performance of companies with small market capitalization. In addition, there are other index funds of this type based on market capitalization, themes, sectors, etc.
Rather than choosing individual stocks from various indices – large cap, mid cap, or small cap – you can gain exposure to one or more of these index funds through a single investment. You can ask your financial advisor or visit the fund company’s website to invest in any of these index funds depending on your risk profile and goals.
But before investing, remember that the volatility of these index funds cannot be excluded, however, such volatility of the net asset value will be in line with the market, i.e. the index that it tracks and therefore the return potential will also depend on the index or sector it tracks.
In addition, index funds have what is called a tracking error which occurs because the fund house charges management fees, marketing fees and transaction costs (impact cost and brokerage) to its holders. of shares. Choose index funds that have a low tracking error.
So, if you want to build a portfolio of mutual funds for long term goals, you can diversify these index funds by replicating different indices and in the long term you can expect stable returns with lower volatility.