A Beginner's Guide to Invest in Index Funds in 2023

As of May 2022, about 19 index funds are operating in India along with 17 ETFs or Exchange Trading Funds. With the number of folios registering a healthy increase over the last two years, ETFs in India are clearly on a growth path! 

When it comes to equity investing, it’s a good idea to diversify risks by investing in stocks and bonds of different companies across various sectors. This is where index funds make a grand entry.

What is an Index Fund and How Does it Work?

They are a type of mutual fund or ETF comprising bonds or stocks that try to match gains with a particular index. So, you will have Sensex index funds, Nifty index funds, and so on. The best way to begin investing in these funds is to weigh the pros and cons first and decide if they are the right choice for you. You should also spend time researching more about the top index funds with the most stable returns before including one in your portfolio. 

There are thousands of indexes tracking the performances of different sectors in the market. The index acts as the benchmark or a means of weighing performance. Investments cannot be directly made to an index. However, one can choose an index fund to invest in or make investments through an ETF. Most index funds replicate the index by holding all the securities of the index. Alternatively, a fund may also approximate an index with the help of securities as well as additional derivatives like futures and options. 

Unlike mutual fund investments that are mostly actively managed, these funds are subjected to passive management. This is because they are actually holding on to the index and the index does not change too often. 

How to Choose a Fund to Invest In?

Before you buy one such fund, there are a few factors to weigh. These include:

1.       What is your risk appetite? How much are you willing to risk for the return you are expecting?

2.       If you already have a fund in mind, what would be the risks associated with it?

3.       Is the fund strategy in harmony with your investment goals? 

4.       How much will you specifically pay for purchasing, owning, and subsequently selling the fund? The cost associated with owning a fund is called an expense ratio. It is calculated as the percentage of the amount invested in the fund. Typically, you must look for an expense ratio close to 0.2%. 

5.       When will you need the money? There is no point in investing unless you can access the money when you need it the most! Planned timelines are important. 

Use these assessment queries to guide you to the most befitting choice for your specific needs. 

How to Begin Investing? 

You can either choose to invest a lump sum amount to the fund of your choice or opt for SIP or Systematic Investment Plans where a stipulated amount of money is invested into the fund of your choice, either monthly, quarterly or annually. You can begin with an amount as low as Rs.500, invested at regular intervals!