How to invest in index funds (2024)

How do index funds work?

Let's say oneIndex fundstracks the NSE Nifty Index. This fund will therefore have 50 shares in corresponding proportions in its portfolio. In addition to bonds, an index can also include shares and equity-related instruments.

The index fund ensures that it invests in all securities that the index tracks. While an actively managed mutual fund aims to outperform its underlying benchmark, an index fund that is passively managed attempts to match the return of the underlying index.

How to invest in index funds in India - step by step process

Do you have any questions aboutinvesting in index fundsand curiousHow to buy index funds in India?If so, we've got you covered. This section discusses both online and offline ways to invest in index funds.

- Online proces

• TRIN 1:Open a mutual fund account through a secure website of your choice.
• TRIN 2:If you have not already done so, complete your KYC procedures and proceed to the next step.
• TRIN 3:Enter the necessary information if necessary.
• TRIN 4:Depending on your financial objectives, you should choose the fund(s) in which you want to invest.
• TRIN 5:Select the relevant fund and transfer the required amount.
• BONUSTRIN:If you want to invest monthly, you can also take out a standing order with your banksip(systematic investment plan).

- OfflineTreat

• TRIN 1:Complete the application form and the KYC form carefully and submit it.
• TRIN 2:If necessary, add and enter the necessary information.
• TRIN 3:Based on your financial appetite, choose the fund(s) you want.
• TRIN 4:Pay the investment amount via your chosen payment method.
• TRIN 5:If you want to invest monthly through SIP, you need to set up BillPay, eMandate, eNACH, ADF (Auto Debit Form) or OTM (One Time Mandate) digitally or offline.

Benefits of investing in index funds

When it comes to index funds in India, there are several benefits of index funds that you should know about.

Some benefits ofinvesting in index funds in Indiais:

• Lower expense ratios and low fees

Index funds generally have a lower pricecost ratiothan actively managed mutual funds, meaning you can invest more of your money where it best suits your portfolio.

• Tax benefits

Because index funds are passively managed, they do not buy and sell individual securities as often as actively managed securitiesinvestment associationsDoing. This reduces their tax liability and increases your after-tax returns over time.

• Not in his administration

Index funds are also easier to manage than actively managed mutual funds because they cannot easily change their asset allocation.

This means that once you invest in an index fund, its asset allocation remains the same until you decide to change it yourself, or until another manager takes over from your current fund.

• Unbiased investment

Index funds invest through an automated, law-based process. The amount to be invested in index funds of different securities is specified in the mandate of the fund manager. Doing this eliminates human biases in investment decisions.

Things Investors Should Consider Before Investing in Index Funds

Here are a few things an investor should consider when finding answersHow to Invest in Index Funds in India-

1. Risks and returns

Because index funds track a market index and are passively managed, they are less volatile than actively managed stock funds. Therefore the risk is smaller. During a market rallyindex funds Asreturns are usually good.

However, it is usually recommended to switch your investments to actively managed stock funds during a market downturn. Ideally, you should have a healthy mix of index funds and actively managed funds in your stock portfolio.

Moreover, because the index funds aim to replicate the performance of the index, the returns are comparable to those of the index. One area that needs your attention is tracking errors. Therefore, before investing in an index fund, you should look for a fund with the lowest tracking error.

2. cost ratio

The expense ratio is a small percentage of the fund's total assets that the fund house charges for fund management services.

One of the biggest USPs of an index fund is its low expense ratio. Because the fund is passively managed, there is no need to develop an investment strategy or research stocks to invest in. This reduces the fund's management costs, leading to a lower expense ratio.

3. Invest according to your investment plan

Index funds are recommended for investors with an investment horizon of 7 years or longer. It has been observed that these funds experience fluctuations in the short term but average out in the longer term.

With an investment period of at least seven years, you can expect a return of 10-12%. You can align your long-term investment goals with these investments and stay invested for as long as possible.

4. Darling

Index funds, like stock funds, are subject to dividend distribution tax and capital gains tax on dividend distributionDarlingand capital gains tax.

5. Dividend distribution tax (DDT)

When a fund company pays dividends, aDividend distribution tax(DDT) of 10% will be deducted at source before payment is made.

6. Capital gains tax

By redeeming units in an index fund, you earn capital gains, which are taxable. The bet oncapital gains taxdepends on the holding period: the period in which you have invested in the fund.

• The capital gains you have earned in a period of up to one year = Short Term Capital Gain (STCG), which is taxed at 15%.
• The capital gain you have earned over a period of more than one year = Long Term Capital Gain (LTCG). LTCG up to Rs. 1 lakh is not taxable. Any LTCG above this amount will be taxed at the rate of 10% without indexation.

You might also like to read Best index funds to invest in India

Conclusion

Index funds can help you save a lot of money and can set you up for success in the future.

Due to the recent reclassification of mutual funds by SEBI (Securities and Exchange Board of India), many financial planners are confident that index funds in India will eventually become major players among the various investment options.

The Indian stock market can be scary, to say the least. Investing in stocks seems like a difficult process because there are thousands of stocks, a wide variety of financial instruments and confusing jargon surrounding it.

Plus, it's easy to get caught up in the volatile world of day trading, where you buy and sell stocks every day in an attempt to make big profits by betting on rapid price changes.

However, it may be the best option for you if you are cautious about taking risks and want to make long-term investments with modest returns andbenefits of index funds.

Disclaimer: This blog is for educational purposes only. The securities/investments mentioned here are not indicative.

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Research Analyst - Bavadharini KS