Stock market investments are known to have the best growth potential. As of May 2022, Sensex has grown more than 70% in the last five years, underlining the fact. But at the same time, investing in stock markets does come with risks parallel to its potential. Furthermore, keeping an eye on the market and changing your portfolio according to the trends could become a chore, especially if you are not a full-time trader. That is where index funds could be of help. Let us learn more about index funds and examine if they suit you. 

What are index funds?

Index funds are mutual funds that mirror an index as it is. For instance, a Sensex index fund will have a portfolio similar to the index’s composition. The composition of the fund will change as per changes in the index. There will be a fund manager like a regular mutual fund, but the fund will be passively managed as there is less manual intervention in the portfolio. 

Since it follows an index, the fund’s returns tend to be similar to the index’s, although there may be slight differences because of tracking errors. But what makes investing in index funds more beneficial than investing in stocks or other mutual funds? Let us take a look. 

Benefits of investing in index funds

Lower cost- Mutual funds are managed by fund houses and managers. That means there is an upkeep fee for them, especially to pay fund managers who research to find the correct composition for a fund’s portfolio. As a result, mutual funds charge an expense ratio as a fee to cover such expenses, which is usually a percentage of your investment. But with index mutual funds, there is no need for constant intervention as the fund is designed to track an index. Hence, index funds have a much lesser expense ratio than regular mutual funds, making them incredibly cost-efficient. 

Easier to manage – Stock market investment demands a lot of research and time. If you are an active stock market investor, you will need to always stay on top of what is happening and change your portfolio according to the economic conditions. But when you choose index funds, the fund does it for you automatically. Most indexes contain the top stocks in the stock market or a particular sector. An index fund is regularly updated with all the changes in the index, which makes handling your portfolio easier. 

Zero bias – Like said above, every mutual fund will have a fund manager responsible for managing the fund. That means that a lot of decisions might be based on the manager’s experience and personal opinions. While this might work well for some investors, if you are someone who likes a bit more customisation, index funds are a good choice for you. Since it tracks as index as it is, there is less or no intervention from a fund manager or a fund house. This means your portfolio can stay bias-free and to your liking. 

Are index funds the right choice for you?

Index funds historically give low-risk, predictable returns. It is a great way to make use of the market’s growth, and it works better if you stay invested for the longer term. Hence, if you are a risk-averse, long-term investor, a low-cost index fund might be the best choice. At the same time, if you are looking for aggressive returns or short-term options, index funds might not be the best option.

The growth of Sensex, Nifty, and most other indexes shows that index funds can be a good option for the long term. Make sure you talk to your financial advisor to get the best out of your investment.