What is an index fund ? | How does Index fund Work ?

Index Fund : Index fund is a type of passive mutual fund that imitates the portfolio of an index . Index ia a group of securities that defines a market segment . e.g. BSE Sensex is an index in which 30 companies to be tracked , Nifty 50 is an index in which 50 companies to be tracked . here are several types of indices may occurs e.g. sectorial indices . In sectorial index a particular sector index has to be tracked such as pharma , finance etc.

We have generally heard that Sensex goes higher   and lower means valuation of these companies increases and decreases respectively .

Functions of Index fund ?

An index fund is not an actively managed fund by fund manager , it follows the market indices like BSE Sensex , NSE Nifty etc. But in traditional mutual fund asset management company is actively involved and hence they changes the portfolio composition as they think . As fund manager actively involved in managing the fund that’s why they charges 1 % to 2 % as their service charge . Due to actively management of investor’s fund service charge is higher as AMC (Asset management company) has to hire an expert to manage this .

But index fund is a passive fund , hence there is no active fund manager is required for fund management that’s why in index fund service charge is very low  as compared to traditional mutual fund . In index fund charges varies from 0.1 % to 0.2 % .

If you want to invest in equity market without taking a lot of risk , you may enter through index funds . You should invest in index funds via any Asset Management Company (AMC) and earns higher returns on your investment . Therefore if you have no knowledge about equity or minimal knowledge and want to invest then index funds are good option for you .

When market goes up index fund generate good returns but when market slump returns goes down . Hence it is advised that you should chose a mixture of index fund and actively managed mutual fund in your portfolio .

The returns of index fund and actively managed mutual fund  may be equal in short term but in long run actively managed fund will tend to give higher returns .