What is Index fund?
What is Index fund? Should you invest in an Index fund? : A few days ago in one day the market went up by 5% But my portfolio only grew by 2 or 3%. Then the market went down by 1%. And my portfolio went down by 3-4%. Why does it always happen when we try to make more money and build a good portfolio, but can’t beat the market. What do we do in this case? How can we stay in the market and make good money without taking a lot of risks?
Hello friends, I, am RK Singh, welcome to my Firm MoneyPip. Today we are going to talk about Index I am going to tell you something interesting related to Index in which if you invest, the more the market changes you get more profits.
What Is Index ?
Friends, What is Index? How do we decide which shares go into Index? Because you must have heard of NIFTY 50 and Sensex 30. I will tell you the basics about the index.
Imagine that you went to a shop to buy chocolates. And you were confused about which chocolate to buy there is risk in buying a full box of chocolates and if you don’t like it that it will go waste. In that case, the solution is that we buy a box filled with several types of chocolates. What is the benefit of that? We get more variety and there is less risk of it going waste.
The index is such that in an index, we put small shares from several sectors and make a portfolio which is called the market index. To talk about NIFTY 50, NIFTY 50 has 50 shares taken from different sectors. These shares could be called the best of those sectors. In the case of Sensex, it has 30 shares from a variety of sectors. You must be thinking that Index is a very good place to invest in.
Exchange Traded Fund (ETFs)
I will come back to my first question when I told you that when the market goes up, the portfolio doesn’t always go up.The index is a solution which will give at least as much returns as the rise in the market. That instrument is called ETF (Exchange Traded Fund). Now you must be wondering how to invest in ETFs. And how is it good for me? When should I invest in ETFs? Who is ETF best for? ETF is best for those who don’t know which stocks they should invest in.
But they think that the market is growing so they have to invest But they cannot take the risk of investing in a random stock. It is better for them to invest in ETFs. Because, friends, ETFs track the index. If the index goes up by 1%, ETF also goes up by 1%. In the longer run, you get as much returns as you the index has grown. You must be thinking how we can invest in ETFs.
Investing in ETFs is very easy. If you have a Demat account, if you are registered with a broker Look for ETFs there and you will find multiple ETFs. Some ETFs follow NIFTY whereas some track Sensex. Which one of these you feel more confident about you can buy ETF related to that one. You can buy these anytime, and after buying its settlement is similar to that of shares And it comes to your Demat account.
Now you must be thinking if gOLD ETFs are so good, then why doesn’t everyone invest in it? Everything has some risk associated with it. Some pros and some cons. I will tell you what the problem with ETFs is. ETFs have one major problem liquidity.
What Is liquidity?
To explain liquidity in simple terms if you are buying shares you also need a seller who is ready to sell the shares. Whenever we go to the exchange to buy shares of a company then you get sellers. If the buyers and sellers are readily available then the liquidity of that share is good. In the case of ETFs, liquidity is a problem. There is a chance that you won’t find any sellers when you go to buy.
For example, when the market went up 5%, there must have been a liquidity crunch. Maybe more people wanted to buy and there weren’t enough sellers. If it wasn’t for the issue of liquidity, ETF is a good instrument. If you think that the market is going up you can buy ETFs without second thought. You must be thinking if there is a liquidity crunch who could solve it? If I cannot sell what I have bought, I will have a big issues.
Index Mutual Funds
Friends,this problem too has a solution. It is called Index Mutual Funds. Index mutual funds are like normal mutual funds. They pool money from people invest in instruments that track the index. You get as much returns from this as you get from index. But this mutual fund has an expense which isn’t too much. But the advantage is that if you are in need of money, you can easily redeem. You must be wondering how index funds solve the problem of liquidity.
Because Index funds receive money from a lot of sources. They do not invest all the money and retain some in cash. So that if there is a problem of liquidity they can use the cash to solve the problem. You must be thinking that there are so many types of index funds. Many mutual fund companies offer index funds Which among them is good?
How To Check Best Index Mutual Funds
>>I will tell you two techniques to know Best Index Mutual Funds :
- Expense Ratio
- Less Returns
I will tell you two techniques to know that. First, the expense ratio. Expense ratio is the charge the AMC levies for managing the fund. The lower it is, the better it is for the investors. Because in this case, the investment is done directly on the index. there is less effort, then the expense ratio too must be less. So whenever you compare index mutual funds first of all, compare the expense ratio Only then you think about investing. As I told you index mutual funds keep some portion in cash to fulfill your liquidity requirements But before investing make sure that there isn’t too much portion in cash.
The more there is in cash, the less the returns will be. If there is less returns, investors also get less returns. If you keep watch of these two factors then you can choose a good index mutual fund.
To talk about data regarding ETFs and how it is becoming popular in 2008, the market for ETFs was 800 billion. It has now increased to 5 trillion. What is the reason behind this? The market is becoming more mature there is less alpha. To talk about alpha, how well people are able to time the market, how much more benefits they can earn. People think that rather than losing your money chasing returns that they invest in ETFs. So that if the market goes up you get returns, And there is less loss than usual.
After read this post, I will leave you with a question What do you think is better? ETFs or Index Mutual Funds? let us know in the comments. So please follow the Our Google News and do not forget to Follow to our Google News. We will help you become a better investor. Please Share this Post and Follow to our Google News and comment to give us more ideas on what we should include in the series.