Mutual Funds Investment: Index Funds - What it is and its benefits? A guide for investors
An Index Mutual Fund is a passive investment into the market where the return is directly proportional to the stock performance into the market along with dividend.
Mutual Funds are gaining traction among the public in general but it has been found that majority of the investors are not happy with their fund manager as it's completely dependent upon the investment acumen of the asset manager who is managing the mutual funds that an investor has bought. Therefore, the mutual fund's houses coined an idea where there will be no use of a fund manager. In fact, the mutual fund houses would make a bunch of stocks listed in single index says Nifty 50, Bank Nifty, etc. and open it for the mutual funds' investors along with market and dividend benefits.
Speaking on the benefits of Index Mutual Funds that Kshitij Mahajan, Co-founder at Complete Circle Consultants told Zee Business TV, "Index Mutual Funds are basically an anthology of the top performing stocks listed in one index of the stock market. It's a passive investment fund while normal mutual funds are an active investment." Mahajan said that in Index Mutual Funds, an investor is entitled to the gains registered by the stock, which is a part of the bunch offered to the mutual funds' investor. Meanwhile after changes in the regulation, now an Index Mutual Funds investor is entitled to the dividend announced by the company for its shareholder as well. So, the Index Fund is, in fact, a passive investment into the markets.
See Zee Business video below:
— Zee Business (@ZeeBusiness) June 6, 2019
Asked about what's the difference between the normal mutual fund and an index fund Kshitij Mahajan of Complete Circle Consultants said, "An Index Mutual Fund is available at a cheaper rate than a normal mutual fund. Reason for this is the absence of a fund manager. The return in an index fund is directly proportional to the stock performance in the market as there are zero chances for human intervention." Mahajan went on to add that in normal mutual funds, there is a cap of 10 per cent stock for fund managers while in Index Mutual Funds, there is no capping on per stock investment.