What is Index Fund and How to Invest in Index Fund?

In this article, you will understand how to invest in an index fund and what is an index fund.

What is Index Fund

The index fund is a passive fund Now the question comes what is this passive fund. So there are 2 types of funds:

1. Active Funds
2. Passive Funds

What is Active Fund

Active funds are actively managed by fund managers. He analyzes different industries and companies and then decides himself which shares to buy.

So active funds are actively managed by fund managers, so their expense ratio is high, that is, in exchange for managing your fund, they charge more fees which is between 1 to 2%.

That is, if the expense ratio of an active fund is 2% and you invest that ₹ 1000, then that mutual fund will cut 2% of your total investment annually. 2% of ₹1000 is 20 rupees.

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In return for managing your fund, you will be charged 20 rupees annually.

What is Passive Fund

Passive funds are not actively managed. An index fund is a good example of a passive fund. It is an index fund, it invests in different indices like Nifty all these indices.

So if there is a Nifty index fund then that fund will invest your money in the stocks which are in Nifty according to the weightage of those stocks.

There are total fifty stocks in Nifty 50 and, HDFC Bank is given a weightage of 10.67%, Reliance Industries is given a weightage of 9.98%, Infosys is given a weightage of 6.04%.

And similarly, the rest of the company has also been given different weightage.

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So whatever money you invest in the Nifty Index Fund, 10.67% of the total money will be invested in HDFC Bank stock, 9.98% money will be invested in Reliance Industries stock, 6.04% money will be invested in Infosys stock.

And Similarly, investments will be made in the rest of the stocks as well.

Index Fund Performance

So the job of an index fund is to track the performance of the indices, as much as the return that the index is giving, the same return is given to the people through the index fund.

Index funds do not have to be actively managed, so their expense ratio is very low. For example, if we talk about HDFC index fund Nifty 50, then the expense ratio of its direct plan is only 0.10%.

So the expense ratio in the index fund is almost negligible.

The concept of index fund was started by Mr. John C. Bogle.

Index funds are quite famous in USA and other developed countries but they are not as popular in India yet.

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Mr. Warren Buffett also asks people to invest in index funds, recently he has written a newsletter in which he has advised people to invest in index funds.

How to invest in index fund

Index funds come in two types of formats:

1. ETF (Exchange Traded Fund)
2. Normal

Examples of index funds that come in ETF format are HDFC Nifty 50 ETF, HDFC Sensex ETF and Reliance Sensex ETF, etc.

So to invest in these ETF index funds, you need to open a Demat account and after opening a Demat account you can buy ETFs.

And those which are normal index funds such as HDFC Index fund nifty 50, ICICI Prudential Nifty index fund, SBI Nifty index fund, etc. have to invest in the same way as you normally invest in mutual funds.

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You can buy these funds from platforms like Groww, Paytm Money or you can buy from the website of AMC (Assets Management Company).

For example, if you want to buy SBI Nifty Index Fund, then you can buy this index fund by visiting the SBI Mutual Fund website.

ETF index fund cannot be SIP, the same is a normal index fund, you can do SIP in them which is a very good thing.

While buying an index fund, always keep in mind that you are buying a direct plan because the expense ratio of a direct plan is very low.

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