Mutual Funds

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Index funds

Index Funds are passive mutual funds that mimic popular market indices. The Fund Manager doesn’t play an active role in selecting industries and stocks to build the fund’s portfolio but simply invests in all the stocks that make up the index to be followed. The weightage of the stocks in the fund closely matches the weightage of each of the stocks in the index. This is passive investment i.e the fund manager simply copies the Index while building the fund’s portfolio and tries to maintain the portfolio in sync with its index at all times.

If the weight of a stock within the index changes, the fund manager must buy or sell units of the stock to have its weight in the portfolio aligned to that of the index.

Benefits of Index Fund

Index fund tries to match the performance of a specific market benchmark or index The risks are directly aligned with its benchmark’s risks

Index funds enjoy low expense ratio as they don’t need to be constantly monitored.

Since index funds follow its benchmark, they enjoy low management fees since an index fund mimics its underlying benchmark, there is no need for an efficient team of research analysts to help fund managers pick the right stocks. Also, there is no active trading of stocks. All these factors lead to the low managing cost of an index fund.