Investing In Index Funds? Find Out What The Benefits And Challenges Are

Index Funds are based on an underlying index such as BSE Sensex and NSE Nifty, and these funds simply mirror the performance of the index concerned

Index funds are believed to be ideal for those who are risk-averse and expect predictable returns. Since index funds are not actively managed by fund managers, they incur low expenses and help an investor balance his risks across his investment portfolio. They are based on an underlying index like Nifty or Sensex, and these funds simply mirror the performance of that index. Index funds are free from fund managers' biases and are the most advocated way of investing by experts for retail investors. These funds do not aim to outperform the market. Instead, they try to maintain uniformity. For example, an index fund tracking Nifty will have all the 50 stocks in its portfolio in the same proportion. Typically, index funds give returns equal to the benchmark. However, there could be a tracking error, meaning there is a possibility of a small difference between fund performance and the index. Advantages Good returns: Since Sensex and Nifty have performed well over time, index funds promise good returns over a long time. The big problem with diversified equity funds is human discretion in choosing one over the other. The discretion has a very strong element of conditioning, biases, and past experiences of the fund manager. But index funds overcome these biases because of their passive nature.