Index funds are a category of mutual fund schemes designed to track and mimic the performance of a specific market index. They invest in the same securities that make up the benchmark index and aim to reflect the index's strategy and risk profile. There are different types of index funds available in the market, and understanding their features can help you select the option that best suits your investment goals.
Index fund categories you should know about
Below are nine index fund types you can invest in:
- Broad market index funds
Broad market index funds are designed to track broad market indices like the NIFTY 500 or the NIFTY Total Market Index. These funds invest across a wide range of sectors and industries, offering you broad exposure to the overall market.
They mimic the performance of broad indices and aim to reflect the market's overall behaviour and performance to give you a diversified investment portfolio.
- Factor-based or smart beta index funds
Factor-based index funds, also known as smart beta index funds, use various investment factors to determine stock weightings within the fund. Some of these factors include value, growth, low volatility, quality, Price-to-Earnings (P/E) ratio, dividend yield, and momentum.
These funds seek to generate better returns or reduce risk by employing alternative strategies beyond traditional market capitalisation.
- International index funds
International index mutual funds are a great choice if you want to diversify your investments globally. These funds invest in foreign market indices, such as the S&P 500, NYSE FANG+ index, or NASDAQ.
They provide exposure to international markets and help broaden your investment reach across different geographies, allowing you to tap into growth opportunities outside the Indian stock market.
- Market capitalisation index funds
Market capitalisation index funds track indices based on market capitalisation. These indices select stocks according to their market values. Larger companies have a greater impact on the fund’s performance compared to smaller ones in these funds. Some examples of these indices include the NIFTY 50 or the NIFTY Midcap 150.
You can gain exposure to companies of various sizes by investing in market capitalisation funds.
- Strategy index funds
Also known as thematic index funds, strategy index funds employ specific investment strategies to guide their equity allocation. These strategies might involve criteria such as the Price-To-Earnings (P/E) ratio, Price-To-Book (P/B) ratio, or other investment metrics.
These funds focus on particular themes, such as technology, healthcare, artificial intelligence, renewable energy, etc., and adjust their allocations based on market conditions.
- Custom index funds
Custom index funds are tailored to meet specific investment goals. They track bespoke indices and offer a personalised approach to investing. Custom index funds offer the ability to tailor your portfolio to include specific sectors while leaving out industries that do not meet your investment criteria.
This customisation ensures that your investment aligns with your unique objectives and risk tolerance.
- Equal weight index funds
Equal-weight index funds allocate an identical weight to each stock within the index, regardless of its market size. Each company contributes equally to the fund’s performance and ensures balanced exposure across all included stocks.
These index funds do not allow larger firms to dominate the fund's performance and provide a more even distribution of risk and return across all stocks.
- Debt index funds
Also known as bond index funds, debt index funds track indices focused on fixed-income securities. Some examples of such indices include the Nifty AA Category Ultra Short Duration Bond and the Nifty AA Category Medium to Long Duration Bond.
These funds offer a diversified portfolio of debt instruments, such as government, corporate, and municipal bonds, with defined maturity periods. They provide a stable income stream and lower risk compared to equity funds, making them suitable for conservative investors.
- Sector-based index funds
Sector-based index funds focus on specific sectors or industries, such as technology, banking, or infrastructure. They target particular industries, such as in the case of indices like the Nifty Financial Services Ex-Bank index or the Nifty Consumer Durables Index.
They offer opportunities to capitalise on sector-specific trends and allow you to benefit from growth in particular areas of the market.
Conclusion
You can choose to invest in a single type of index fund or create a diversified portfolio by combining different types of index funds. Each type offers different advantages and aligns with specific investment goals. It is crucial to conduct thorough research before making any investment decisions. Understand the risk and return profiles of the funds you are considering to ensure they match your financial objectives and risk tolerance.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
