Index funds as the name suggest copies and index.
Eg: HDFC Index Fund – Sensex Plan : copies Sensex.
Sensex is made of 30 stocks. So this fund would buy all these 30 stocks in the same proportion as that of the index.
Index funds are passively managed funds, where the fund managers do not use his own skills to pick stocks. But he buys the same number of stocks that makes the index and in the same proportion.
Some examples of index funds:
UTI Nifty Index Fund: Which follows Nifty 50 which is a Large-Cap index
ICICI Prudential Nifty Next 50 Index Fund: which follows Nifty next 50 which is a Large-Cap index
Sundaram Smart Nifty 100 Equal Weight Fund: which follows Nifty 100 equal-weighted index, which is a multi-cap index
Principal Index Fund Midcap: Which follows nifty free float mid-cap 100, this index belongs to the mid-cap category
Advantages of index funds
- Low expense ratio
- No issue of bad stock selection or fund manager dependency.
- Easy to understand and select funds.
Disadvantages of index funds
- No flexibility of stock selection.
- No possibility of above-average return.
- This is the biggest disadvantage of index funds as compared to actively managed funds in India. India being an emerging economy there are a lot of opportunities for the fund managers of actively managed funds to explore and generate returns for their investors. actively managed funds have been able to beat the benchmarks by a huge margin for the last 2 decades and would continue to do so for some time more.
- Have to stick with bad performing stocks
- Just because they are the part of the index follows
- The fund holds the risks associated with the asset class