Market & Stocks

Index funds: Meaning and why should you include them in your investment portfolio

Investing in a diversified portfolio is key to ensuring financial security and achieving long-term investment goals. Index funds are an important component of this strategy, offering investors a low-cost, passively managed way to gain exposure to broad segments of the stock market or other asset classes.

Given the importance of these funds for achieving long-term investment goals and helping build financial security, here is a brief overview of what index funds are and why you should consider including them in your investment portfolio.

What is an index fund?

An index fund is a type of mutual fund that follows a specific stock market index such as NSE Nifty, BSE Sensex, etc. Unlike those funds, which are actively managed by professional investors, index funds are passively managed because they track an existing index. This means there is no need for active management by an individual investor or professional manager. Instead, the fund manager follows the set rules and criteria of the underlying index and invests in stocks accordingly.

Top benefits of index funds for your investment portfolio

  1. Lower expense ratio and low fees

Index funds have lower expense ratios because of their passive management strategies. Passive investing does not require active day-to-day trading and in-house stock analysis, allowing these funds to maintain low operating costs. Since more of your money goes towards investing rather than paying for management fees and other costs, you can maximise your returns without worrying about high expenses reducing your profits.

  1. Diversification through broad market exposure

When you invest in index funds, your portfolio gets exposure to the broad market and multiple companies within the index with one investment. Therefore, you will benefit from the collective performance of the underlying securities in the index. If a few of those stocks depreciate, your holdings can still be protected by other better-performing investments. Plus, diversifying also helps to minimise risk and reduce volatility in your overall returns, making it easier to maintain consistent gains over time.

  1. An index mutual fund is easy to manage

Index funds do not require regular monitoring of stock prices and market conditions. You don’t need to constantly research new stocks or make decisions about when it’s best to buy or sell shares.

Instead, the management team will simply create a portfolio that reflects the composition of the chosen market index, for instance, Nifty 50. This allows you to build your portfolio and grow your financial wealth with minimal effort.

  1. Allows for systematic investing to build wealth over time

With index mutual funds, it’s easy to start a Systematic Investment Plan (SIP) where you can invest small amounts at regular intervals instead of making one large investment. Plus, you can set up auto-pay so that your investments are automated and never missed. With regular contributions, regardless of market conditions, you can ensure you don’t miss any opportunities for growth during volatile markets.

Last notes

Investments in index funds can be a great way to get exposure to different stocks with minimal effort and cost involved. With several benefits combined, including low management fees, instant diversification across asset classes and sectors, and easy performance tracking over time, most experts often agree that index funds should form a part of any comprehensive investment strategy.

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