Index Mutual Fund (MF) invests in stocks that replicate a stock market index such as the NSE Nifty, BSE Sensex, etc. Also, called passive management or investment, the fund manager in this invests in the same securities as present in the underlying index in the same proportion.
Investors can choose the benchmark index of their choice.
The returns from an index fund, Yashpal Sharma, vice president of Taurus Mutual fund explains, more closely reflect the returns of the underlying index.
Hence, investors who want predictable returns and prefer investing in the equity markets without taking a lot of risks prefer these funds.
According to ClearTax, these funds do not require extensive tracking and is an excellent option if investors wish to generate high returns amid a rallying market. However, they will have to switch to actively-managed funds during a market slump.
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During the market downturn, index funds may lose their value.
Raghvendra Nath, managing director of Ladderup Wealth Management advises against investing in index funds.
While index funds prove to be a cost-effective way of investing, Nath believes that the same cannot be said for the portfolio construct of the fund which is not optimal.
"This is because many times the index gets lopsided to some sector or stocks in particular which have run up a lot which investors may not want to enter at certain levels. This reduces the flexibility of the portfolio and increases concentration risk," Nath warns.
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Moreover, people, these days are gravitating towards index funds based on the returns of the past two years where a select few companies contributed to the entire gains of the Indices, Nath affirms that such kinds of skewness cannot continue for long as it represents unnatural market conditions.
Thus at least in India, he opines, it is prudent to invest in actively managed funds as opposed to the passive way of investing.
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