What is an index fund?
Index funds are schemes that try to invest in those equity shares which make up a particular index. For example, an Index fund which is trying to mirror the BSE-30 (Sensex) will invest in only those 30 scrips that constitute this particular index. Investment in these scrips is also made in proportion to each stocks weight in the index.
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.
An index fund is an investment that relies on computer models and some human factoring to determine the components of a market. The low cost, diversity, simplicity and long-term performance of index funds make them attractive to first time investors and experts alike. The investment is usually in securities comprising of stocks and bonds of companies that choose to be included in the particular index. In other words, an investor chooses to purchase into all or most of the companies included in one index. Some examples of market indexes are the S&P 500 Composite Stock Price Index and the Wilshire 5000 Total Market Index. Index funds are generally easy to invest in, and there is no research that needs done on individual companies as in mutual funds. There is also less to manage and track with index investing, saving the investor time and money. Index fund fees are generally lower than managed funds because there is less time spent in making individual investment decisions. Another advant
A fund whose portfolio mirrors a particular index, both in terms of composition and individual stock weightages. For instance, an index fund that tracks the Sensex will invest only in the Sensex stocks. It is also known as a passive investment strategy, as the fund’s performance will invariably mimic the index concerned, with a minor tracking error.
Index funds are designed to mirror the performance of a specific market index, such as the Dow Jones Industrial Average or the Standard & Poor’s 500, by investing in either all or a representative sample of the companies in the index, since it is not possible to invest in the index itself. Fund managers model their funds’ performance to the index they are trying to mirror. Of course, if the index is down, the fund’s performance will reflect this decline.
