Stock market indexes are a reflection of the growth of stock markets in India. Nifty and Sensex, the leading indexes, comprise the top public companies in India, and they both have grown more than 65% as of early July 2022 in the last five years.
This makes investing in these indexes a potentially profitable option. But picking each stock from the index and investing in them could turn out to be a chore. It could be extremely costly as well. Here, one viable option is to invest in a fund that has the same composition as the index. But is there a fund like that? If yes, how do you go about investing in them? Let’s find out.
Index funds vs ETFs
Index funds and ETFs are two ways in which you can invest in indexes through a fund. Both the options try to track an index as it is. It means that their portfolio’s composition will be exactly similar to that of the fund.
But there are certain differences as well.
To begin with, index funds are a form of mutual funds, while ETFs are tradable on the stock market.
Both funds are passively managed as the fund’s portfolio is a replication of the index, and the fund manager doesn’t need to actively intervene in the portfolio.
Since we are discussing index funds, let us learn about some of the best strategies you can use while investing in them.
Target the main indexes
One way you can go about investing in them is by targeting the main indexes like the Nifty and Sensex. As we have discussed above, they contain the cream of the stock markets, and they have the potential to grow in the long term, offsetting minor setbacks.
The best example is the Nifty and Sensex itself. Even though there were multiple prolonged setbacks, the indexes kept growing in the long term.
But a word of caution – past performances may not always indicate the future. Stockmarkets can get unpredictable, and so do their indexes.
Look into sectors
A lot of investors make the mistake of thinking index funds just follow the main two indexes. There are multiple index fund options out there that follow different sector indexes as well.
A sector index fund is a type of index fund that tracks a sector-specific index. For instance, Nifty IT or Nifty Metal.
These funds usually contain the best stocks in that particular sector. Hence, it is a potentially good opportunity to make money out of the growth of a particular sector. For instance, if you feel like the Nifty 50 index is going to grow exponentially in the future, you could invest in an index fund that follows an IT index.
Make it a passive investment option
As we have discussed above, index funds are passively managed. This is because the fund manager needs to bring about changes in the portfolio only when there is a change in the index. Even when there is a change, it doesn’t require the manager to research on their own. Similarly, index funds can be a good passive investment option as well. Most indexes tend to grow over time, and because of that, you need to keep an eye on the fund all the time. At the same time, you would have more time to monitor your primary investments closely while the index funds grow silently yet decently in the background.
Index funds are an easy option to track a growing index but make sure you keep an eye on factors like expense ratio and tracking errors to set reasonable goals.