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Pros and cons of investing in index funds
Index funds are a low-cost way of investing in stocks and debt instruments. As this mode of passive investing has taken root in India, it’s worth knowing some of the pros and cons of investing through index funds.
Pros
As the invested funds closely track the market index like Nifty or Sensex, the fund manager’s biases towards any particular stock, or industry sector are eliminated.
Sensex and Nifty have historically proven to perform well over a long time. Since index funds mimic these market indexes, investors have a clear visibility of their returns and past performance of these indexes.
The overall cost of investing in index funds is lower compared to actively managed funds. Therefore, you can save and earn more.
Cons
Lack of discretion restrains fund managers from taking asset allocation decisions, especially when certain stocks are overvalued or undervalued.
Index funds are subject to market index tracking errors due to changes in index constituents, corporate actions, liquidity provisions, etc.
How to Invest in Index Funds?
You can purchase units of an index fund of your choice directly from the Asset Management Company (AMC) providing it or through your mutual fund distributor. You need to complete your KYC KYC formalities, if you have not done so previously. Select the fund and make payment to complete your purchase.
List of Top Index Funds in India
Here is a list of index funds you may consider investing in:
Index Fund | Expense Ratio | Returns (per annum) |
|---|---|---|
| Nippon India Index S&P BSE Sensex | 0.15% | 14.11% |
| ICICI Prudential S&P BSE Sensex | 0.16% | 13.52% |
| TATA S&P BSE Sensex | 0.27% | 13.87 |
IDFC Nifty 50 | 0.10% | 12.85% |
| UTI Nifty 50 | 0.20% | 12.7% |
Read more: Benefits of Investing in Fixed Deposits
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FAQs
What is the applicable tax on index funds?
Short-term capital gains on equity mutual funds are taxed at 15%, whereas long-term capital gains up to Rs 1 lakh are exempted from taxation. Long term capital gains exceeding Rs 1 lakh are taxed at 10%.
What is the minimum investment for index funds?
Although one can invest any amount in index funds as specified by the provider, one can start investing in NIFTY 50 index funds for as low as Rs 500 via SIP.
What are SIPs for mutual funds?
Systematic Investment Plan (SIP) is an investment route for mutual funds with which you can invest in a disciplined manner. It allows you to invest a fixed amount based on your choice.
