Index funds try to copy the performance of a stock market index. The most common index fund tries to track the S&P 500 (US funds) or the NSE Nifty (Indian Funds) by purchasing stocks using the same percentages as the index. Some index funds invest in all of the companies included in an index; other index funds invest in a representative sample of the companies included in an index.
The intention of index funds is not to beat the index but to match it. As the explanation suggests they are passively managed. The fund manager doesn’t need to invest his time in researching the stocks. He just needs to give instructions to buy securities of index constituents. The professional cost or management fee for index funds is very less compared to actively managed funds i.e. expense ratio is less for index funds. Index funds are also called as tracker funds.
Why to go for index funds when their intention is not to beat benchmarks? Most of the actively managed mutual funds don’t beat the benchmarks or indices. They will try to take more risks to beat the benchmarks. As you know when there is more risk involved the returns would be volatile. For the investors who don’t want to pay more fees Index funds serve a better purpose.
One point to be noted is because an Index fund tracks particular securities of an index it would have less flexibility to react to price fall compared to actively managed funds. ETF (Exchange Traded Funds) index funds are also available.
The below are a few examples of index funds in India.
HDFC Index fund – Sensex Plus
ICICI Prudential Index Fund
Birla Sun Life Index Fund
Franklin India Index Fund – NSE Nifty
Impact cost also plays a major role in the performance of an index fund.
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Sathish Emmadi
Sathish Emmadi is a co-founder & editor at Lastbull.com. He is presently working in IT for one of the world’s top mutual fund companies. Handled multiple projects in BFSI (Banking,Financial Services and Insurance) domain. An Engineering Graduate from NITW.
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{ 1 comment… read it below or add one }
Hi Sathish,
Not sure how old is this article.
Indian index funds struggle on both the points you have mentioned. First of all, their tracking error is really high and they are unable to really mirror the benchmark.
Second, they are not really cheap compared to their counterparts in developed countries. Some of them have expense ratios nearing those of active funds.
I guess this market is not mature enough as of yet.