Investing in index funds has been appreciated by a lot of investors. The people who do not have a huge amount of time to do research on companies and find a few best stocks to invest in, for those people investing in the index fund is one of the best ways to grow their capital, even the investors who take more risk, they also put their money in index funds to create a balanced portfolio. Know more about How To Invest In Index Funds?
On average, if you invest for the long-term, you will get 13-14% returns based on the past performance of the index funds. It is said that the majority of active mutual funds cannot beat the indices (index funds) in the long run. Getting 13-14% returns from other assets is a hard task to do, that’s why index funds are so popular among investors. Let us dig into it in a better way.
What are index funds?
Index funds are nothing but a kind of mutual fund. There are two types of mutual funds that exist, active and passive mutual funds. Active mutual funds are managed by fund managers based on their stock-picking strategy, and passively managed mutual funds are these index funds where no one is there to pick stocks on behalf of yours. Here you will get the top companies from every category.
If you invest in passively managed mutual funds, then whatever the amount you invest, it would copy the indices. For example, in the USA, one of the popular indices is S&P 500, which means your capital will get invested into 500 companies listed in that indices based on the percentage each company holds.
And when it comes to investing in actively managed mutual funds, here your manager has the right to invest in the companies that they think are good and can perform well shortly. It doesn’t mean they invest without a strategy but as fund managers, they would want to get higher returns so investors will choose their mutual funds.
Whenever you invest in the stock market through a mutual fund, you have to pay an expense ratio, and that expense ratio is a fund manager’s profit. It is said that the majority of actively managed mutual funds are not able to beat indices in the long-term, and at the same time, there are also a few good mutual funds that beat indices and give extraordinary returns but the number of such funds is not so huge. So, in that case, it would be better to go with index funds rather than investing through actively managed mutual funds.
HOW TO INVEST IN INDEX FUNDS?
A lot of people want to start their investing journey, and most of them would want to start with a secure place like index funds. Although index funds are not a secure option nowadays, if you invest for the long term, you can expect a sensible return. The process of investing is simple, to start investing, you need a DEMAT account like a bank account is important to deposit or withdraw cash, In the same way, you need a DEMAT account to invest in the stock market. After opening your DEMAT account with your favorite broker, you will be eligible to invest in the index funds. After that, you have to choose a passively managed mutual fund that holds all the companies of an index.
TWO WAYS PEOPLE INVEST IN THE INDEX FUNDS :
The first one is, that people invest a lumpsum amount in the index fund, and the second one is they start a sip (systematic investment plan), which has been recommended by the experts, especially for someone who does not have many ideas about investing.
In the first place, if you invest a lump sum amount, you might have taken a risk by investing all of your money together. If the market would start going down, you will not have any option rather than watching your portfolio in red. Although it will break its previous pick, nobody knows the right time. At the same time, you have lost the opportunity to invest in the bear market, because if you would invest when the market is low, you will get more NAV of a mutual fund than when the market is high. Because the price is low due to the market crash.
In the second place, if you start a sip, you will have the liberty to invest whenever you want irrespective of the market condition, and for that reason, you will get an average return because you have been investing consistently every month. When you see the market has fallen a lot, you can invest more money to get more NAV at a lower price because you know that one day or another, you will have profits.
DOES EXPENSE RATIO HAVE ANY MAJOR IMPACT ON INDEX FUNDS?
Whenever you would go to select a mutual fund, always check the expense ratio. Mostly in active funds, the expense ratio is more than 1.5%, but in index funds, the ratio is lower than that. For example, S&P 500 expense ratio is 0.02%, but sometimes, you would get to see some index funds’ expense ratio is around 0.5%, try to avoid such funds because expense ratios play a significant role. In the starting time, you wouldn’t see any impact, but later it will have a huge impact. Try to go with the mutual funds which have a lower expense ratio because ultimately, they all are following the same indices, it doesn’t make any sense to pay more expense ratio.
CONCLUSION:
There are a lot of things that people should know before starting investing in the index fund, it would help them not make silly mistakes that most index fund investors end up committing when they would start. Throughout this article, you might have gotten an idea of how to start investing in the index fund and what are a few things a retail investor keeps in mind while investing in the index funds.
