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Index mutual funds: Passive investment options

Index mutual funds Passive investment options

The Indian mutual fund industry mobilized an impressive ₹8.25 lakh crore until April 2023. This burgeoning trend signals a significant shift in the way Indians choose to grow their wealth. It comes as no surprise, therefore, that several Indian investors are opting for popular mutual fund varieties such as index mutual funds and liquid mutual funds to accumulate and grow their wealth. 

How should investors select Index mutual funds in India?

Selecting the right index mutual fund in India requires a thoughtful approach. Here are five key points to consider when making this crucial decision:

  1. Investors must note their investment goals and research Index funds online: 

Before diving into the world of index mutual funds, investors should have a clear understanding of their investment goals. Once they fix these objectives, investors should conduct thorough research online. Various financial websites and resources provide comprehensive information on different index funds; including historical performance, portfolio composition, and fund manager details. 

  1. Investors must conduct a risk versus returns assessment: 

Index funds endeavour to replicate the performance of a particular stock market index such as the Bombay Stock Exchange (BSE). However, investors should still assess the risk associated with the chosen index. Historical volatility, market conditions, and sectoral composition are all factors that can impact risk levels. Investors should choose an index fund that aligns with their risk tolerance.

  1. Investors must check the expense ratio of the Index fund: 

A mutual fund scheme’s “Expense Ratio” is the annual cost of managing the fund which mutual fund companies represent as a percentage of the fund’s AUM (Assets Under Management). Index mutual funds have lower expense ratio since they mutual fund house passively manages them. Investors can use a mutual fund SIP calculator to calculate the value of their Index fund investments at the end of the investment horizon.

  1. Investors must also check the taxation of their Index fund investments: 

Investors are taxed a “short-term capital gains tax” for the investments that they hold for less than a year at the investor’s applicable income tax rate. A “long-term capital gains tax” is applicable for investments held for more than a year at a flat tax rate with indexation benefits. 

Which type of investor must invest in an Index fund?

Investors looking to rebalance the risk in their portfolio can choose Index mutual funds:

  • Diversification: Index funds provide instant diversification by replicating the performance of an entire index, which can consist of numerous stocks or securities. 
  • Passive Approach: Investors who prefer a hands-off approach to managing their investments find index funds attractive. These funds require minimal active management, making them suitable for those who lack the time or expertise to pick individual stocks.
  • Lower Costs: Index funds typically have lower expense ratios compared to actively managed funds, which means investors can keep more of their returns. 

Index funds are an excellent choice for investors seeking diversification, a passive approach, and cost-efficiency in their portfolio. Investors can compare mutual funds online and harness the potential of index mutual funds as a valuable addition to their investment strategy. They should use an online mutual fund calculator to assess their potential returns at the time of the mutual fund’s maturity in the future. 

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