A readymade guide on what are index funds and how to invest in index funds

It is well-known that there are two primary approaches to investing. One is the active management approach and the other is the passive management approach. Within passive investing, an interesting investment option for you could be index funds. However, before you take the plunge you must understand what are index funds and then assess how to invest in index funds.

What are index funds?

An index fund is simply a type of mutual fund that invests in all the constituents of an underlying index and in the same proportion as the index. So, when you invest in an index fund, you are essentially investing in the underlying index. As a result, the returns generated on the index fund are also nearly in line with the returns of the underlying index. Take for example a Nifty 50 index fund. The fund manager will buy all the stocks that are present in the benchmark Nifty 50 index and that too in the same proportion. Following this, the index fund will track the returns generated by the benchmark Nifty. The reason why this is known as passive investing is because the fund manager simply tries to replicate the returns generated by the underlying index and not outperform the index. The returns of index funds will generally be slightly lower than the return on the underlying index to account for some minimal expenses and charges.

Benefits of investing in index mutual funds

It is good to know what are index funds, but it is even better to know how they can add value to your investment portfolio. Some of the benefits of investing in index funds include:

• Diversification:You all know that diversification can help you create a robust and long-term portfolio. However, identifying multiple investment opportunities and then investing in them in the right proportion can be a challenging task. Index funds easily take care of this problem for you.
• Growth:While indices and markets fluctuate over the short term, history shows that they end up generating strong returns over the longer term. Index mutual funds allow you to diversify your corpus across the companies which are a part of the underlying index, offering you a chance to participate in the growth of the index.
• Low cost:Index mutual funds are passively managed. Since the main aim is to generate market-like and not market-beating returns, the fund management expenses are relatively lower compared to actively managed funds. Additionally, since the level of trading activity is low, index funds usually have lower transaction costs. All of this translates into a lower cost for the investor.

Now that you know what are index funds and how they can benefit you, the next step is to understand how to invest in index funds.

How to invest in index funds?

Investing in index funds has now become very simple. You can either do it online or offline. However, the online process is simple and can be done from the comfort of your home. All you need to do is:

• Log on to the mutual fund or distributor website where you hold an account
• Complete your KYC formalities, if not already done
• Select the index fund in which you wish to invest and transfer the required amount

You can even choose to start a Systematic Investment Plan (SIP) in an index fund of your choice. Simply select the amount you want to invest through SIP, select the frequency and date, and you are all set. Further, if you select the auto-debit option, then money will regularly keep getting invested in the index fund of your choice.

Now that you know what are index funds and how to invest in index funds, all you need to do is proactively reach out to your advisor, understand which index funds are aligned with your asset allocation strategy, and simply start investing.

An investor education initiative by Edelweiss Mutual Fund

All Mutual Fund Investors have to go through a onetime KYC process. Investor should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit - https://www.edelweissmf.com/kyc-norms

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY