Top 5 reasons to invest in index funds

New Delhi: Why not invest in index funds that already have a portfolio of companies from various industries instead of diversifying your portfolio and spending time analysing the micro and macro economy?

Let us first define index funds before considering them as an investment option. Index funds are a collection of stocks that attempt to replicate the performance of a financial market index such as the Nifty or Sensex.

The two main approaches are active and passive fund management. The fund manager of an active fund frequently buys and sells equity in the short term.

Passive fund managers, on the other hand, concentrate on stocks that are suitable for long-term investment. Because the fund manager will track the returns of stocks based on a specific index, index funds fall under the category of passive fund management.

Index funds are a great way to diversify your portfolio for long-term growth. It is easy to invest in because it requires less investment research and is less expensive, allowing you to grow your money.

Why invest in index funds?

If you are still unsure of why to put your money in index funds, check out the following benefits that these funds offer.

Predictable

The pinnacle of passive investing is index funds. The index fund's portfolio becomes much simpler and more predictable because it is only pegged to the index's members.

You do not need to track each company’s performance because the index will not be influenced by internal mismanagement at any one company. As a result, it will be easier to establish predictability in return.

Transparent

Index funds significantly overcome human bias, which is one of their main advantages. The significant preference given to fund managers who manage diversified equity funds is a problem. As a result, the fund manager's conditioning, prejudices, and past experiences influence the fund's investing strategy. The index fund, as a passive fund, only follows the index, making it more transparent.

Reduced tax liability

Unlike active funds, index funds do not require you to pay tax on a short-term capital gain of 15 per cent (plus, surcharge and cess).

Because index funds are managed passively, fund managers do not sell or buy frequently. You will have to pay long-term capital gain in order to receive the benefit indexation.

Low expense ratio and charges

Because an index fund mirrors its underlying benchmark, an effective staff of research analysts is not required to assist fund managers in selecting the best companies. Furthermore, there is no stock trading going on. All of these factors contribute to an index fund's lower management costs.

Increased market coverage

Invest in a ratio similar to that of an index to ensure that your portfolio is well-diversified across all industries and stocks. As a result, an investor can use a single index fund to capture the market's broader sector's expected returns. Investing in the Nifty index fund gives you access to 50 securities from 13 different industries, ranging from pharmaceuticals to financial services.