When you want to invest in stocks but don’t know which stock is best and will give you good returns in the long term then for you choosing to invest in Index Fund are the best option. So how to decide which is the Best Index Fund in the market and how do Index Funds works?
What is an Index fund and How do Index Funds work?
An index fund is a type of Mutual fund that follow the market indices like Nifty 50 or BSE Sensex 30 in India and S&P 500 in the USA. Like Mutual funds Index fund is also managed by a fund manager but the fund manager can’t choose which stocks they should buy or sell, the fund have to follow the ratio of the market index.
For example, if you buy a Nifty 50 Index fund then the fund will have all 50 stocks in the same ratio as it comes in the Nifty 50 index which makes it well diversified and less risky to invest than choosing individual stocks without any proper research.
Factors to Consider Before Investing in Index Funds
There are a few factors that are very necessary to consider before choosing which are the Best Index Fund for you:
Investment period- Index Funds are for long-term investment, it is advised that you should hold the fund for at least 5 years so you can get good returns on your investment. Index funds are all about compounding, the more years you invest in the more returns you will get.
So, if you want to invest for the short term then investing in an Index fund will not be a good idea for you.
Expense Ratio- The expense ratio is the annual fee that the fund charges to cover its operating expenses. Lower expense ratios are generally better as they leave more of the fund’s returns for the investors.
Mostly Index fund’s expense ratio is less because the fund manager doesn’t have to actively analyze the stocks like in mutual funds.
Tracking Error- Tracking error is a measure of how closely an index fund’s performance matches the performance of the index it is tracking. It is calculated as the standard deviation of the difference between the fund’s returns and the index’s returns. A lower tracking error indicates that the fund is better able to match the performance of the index.
Holding period- Some index funds also charge some interest when you sell the index fund early. So, you should check the holding period if the funds have any before buying it.
Not to Buy too many Index funds- By now you probably know that Index funds follow market index so buying the same market indices index funds will not give you more returns.
If you are considering buying more index funds then you can invest in different market index funds for example if you want to invest in Nifty 50 stocks then you can buy a Nifty 50 Index fund like that if you want to invest in the top 30 stocks in India then you can buy BSE Sensex 30 Index fund.
Before buying Index funds you should check their expense ratio, tracking error, and holding period so you can choose the best index fund for yourself.
Taxation of index funds in 2023
The short-term capital gain is taxed on those gains which you withdraw before 12 months of buying which is 15% flat in India right now. Long-term gains are those taxes that you withdraw after 12 months of buying the fund which is 10% and up to Rs. 1 lakh of gains will not be taxed for the long term also.
So this is one more reason to buy the index fund for the long term so it can give you more returns.
Advantages of Index Funds
- Consistency: Index funds follow their benchmark regardless of the state of the markets. They are not affected by the manager’s view or market conditions.
- Easy to invest: Index funds are easy to invest in, you don’t have to do any deep research to find out the best index fund in the market.
- Diversification: When you buy an index fund your money is invested in different sector of different stocks which decrease the risk of losing your money.
- Professional management: Index funds are professionally managed, which means that the fund’s holdings are continuously monitored and rebalanced to match the index it is tracking.
These are some of the most advantages of index funds that you should know before choosing the Best Index Fund for yourself.
Types of Index Funds
There are many index funds in the Indian market provided by different companies which have the different expense and tracking ratios but they all follow the below Index benchmarks:-
- Nifty 50 Index fund- Nifty 50 index funds track the Nifty 50 index, which contains the 50 largest companies by market capitalization of India listed on the National Stock Exchange. Over the past 20 years Nifty 50 able to provide approx 15.20% CAGR return to its investor.
- BSE SENSEX Index Fund- This index fund tracks the performance of the BSE SENSEX Index, which comprises the 30 largest and most liquid companies listed on the Bombay Stock Exchange. Over the last 20 years SENSEX Index is also given approx 15.50% CAGR return to its Investors.
- Nifty Next 50 Index Fund- This index fund tracks the performance of the Nifty Next 50 Index, which follows the next 50 largest and most liquid companies listed on the National Stock Exchange of India. This fund has given around 18.35% CAGR return in past 20 years to its investors.
- Nifty Junior Index Fund- This index fund tracks the performance of the Nifty Junior Index, which comprises the 50 small and mid-cap companies listed on the National Stock Exchange of India. This fund can be a little riskier than the above Index funds so it can provide you with either good or bad returns than the above index fund.
These are some of the most famous Index benchmarks in India, many companies provided index funds that follow these benchmarks which you can check out here in Ind money Best Index Fund list or you can check in your broker account, if you don’t have any broker account you can start your investing journey by opening an account from Zerodha which is a top brokerage firm in India and you can find all Best Index Funds here.
This was the summary of how you can choose the Best Index Funds in India in 2023 and make your money grow but remember you should invest for the long term if you need good steady returns. Although investing in Index funds is less risky than buying individual stocks but you should not invest in anything blindly, you should learn about investing and then you will analyze better which are the best index fund or stocks for you.