What Are Index Funds? Features & Benefits

Mutual funds are ideal for long term wealth creation. They can be largely categorized as actively managed funds and passively managed funds. Active funds offer active risk and portfolio management through an elite team of experienced fund managers that are constantly involved in ensuring that the scheme is able to achieve its investment objective. On the other hand, passive funds follow a passive investment style. They are designed to based on the performance of the underlying securities that they track. 

An index fund is a type of passively managed mutual fund that invests in a portfolio of stocks that comprise a particular index like the NIFTY 50 or SENSEX 30. In index funds, the fund manager does not have to decide which securities to buy / sell or which stocks to hold on to for the short or long term. Here the fund manager has to ensure that the portfolio of the underlying index matches the portfolio of the index fund without changing the composition. An index fund is a mutual fund investing in a diversified portfolio of stocks comprised within a specific benchmark. The returns generated by index funds are subject to tracking errors. 

Here are some of the reasons to consider index funds –

•    The index fund’s portfolio matches the constituents of the benchmark, thus making the portfolio mix a lot less complex and easy to predict. 
•    Index funds might be able to generate capital appreciation over the long term but one needs to be patient with their investments and willing to hold on to them so the fund is able to perform to its fullest potential.
•    Equity funds fund are under constant pressure to display results that sometimes push the fund manager to take riskier decisions that may turn out to be volatile for the investors. The index fund manager does not have to worry about taking any such risky investment decisions as their primary responsibility is to ensure that the portfolio composition is mapped to the index in the exact same proportion. 
•    At times, investors are worried about investing in mutual funds as they fear that they might lose their money to human biases. In active funds, the fund manager’s experience plays a decisive role in fund’s overall performance. This fear can be put to rest by investing in index funds, which follow a passive investment style where all they do is track the index while keeping tracking errors to a minimum. 
•    Index funds may track index, gold, currency, and even foreign indices as their benchmark. Investors have a wide range of index mutual funds to choose from.. It is important for the investor to consider an index fund that is ideal for their financial goals, their risk appetite, and their investment horizon. 
•    A passive investment style attracts a low expense ratio making index funds cost effective. An expense ratio is the management costs, administrative costs, and other recurring operational expenses that the AMC must take care of to ensure smooth functioning of the index fund. Since index funds follow passive investing, they attract a much lower expense ratio as opposed to actively managed funds. 

Axis Nifty Midcap 50 Index Fund
An Open Ended Index Fund tracking the NIFTY MIDCAP 50 Index

Investment objective

To provide returns before expenses that closely correspond to the total returns of the NIFTY MIDCAP 50 subject to tracking errors. However, there can be no assurance that the investment objective of the Scheme will be achieved.

Benefits

•    Capturing growth over long term
•    Quality portfolio
•    Diversification
•    Cost-effective
•    Wealth creation

Features

•    The fund provides access to 50 midcaps by market cap in a single fund
•    The index fund aims to capture the growth phase of emerging companies
•    The index fund comprises high quality, liquid stocks
•    The scheme offers low-cost passive investment option

Axis Nifty Midcap 50 Index Fund
(An Open Ended Index Fund tracking the NIFTY MIDCAP 50 Index)

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.