Index mutual funds are mutual funds where Investors pool in their investment to invest in the stocks that emulate stock market index like the NSE Nifty, BSE Sensex, etc. The fund managers of these schemes construct or build a portfolio with the stocks that can maintain the same portion of shares concerning a particular index.
For Example, Index Mutual Fund on Nifty 50, here fund manager constructs a portfolio with the same nifty 50 stocks which match the exact components of Nifty 50 with the same proportion and ensure that investment track the same movement of Index. So, this Index mutual fund moves according to the Nifty 50 Index. Investment on these Index mutual funds won’t be greater than returns offered my Index, but it moves more parallel to the Index which is followed.
Features of Index Mutual funds
Returns and Risk:
Index mutual funds are investing money in companies irrespective of market capitalization, and Investing in stocks which match the exact components of the Index with the same portion so the volatility of this fund will be as same as of Index so this fund gives good returns by following market sentiments and returns will be more similar to returns offered by Index.
Index mutual funds are investing funds in all types of companies following the Index ratio so the risk on these mutual funds is low compared to other mutual funds like Small-cap and Mid-cap mutual funds.
Expense Ratio:
Index mutual funds charge you the fees for managing the Investment by the company that in general it is called the Expense ratio. The Expense ratio to be considered in priority during the selection of scheme any scheme with a lower expense ratio will help to gain maximum profit. The expense Ratio of an Index fund is very low compare to other Mutual funds and some are even as low as 0.1%. Whereas other mutual funds maintain average expense ratio between 1% – 2.5%.
Tax Implications:
Index mutual funds are subject to capital gains and dividend distribution tax both are explained below in brief below slab may change as per policy by the gov’t in the future.
Capital Gains Tax
Withdrawing the units of an Index Mutual Funds will add to taxable capital gains in the Income of an Individual. The rate at which you will be taxed depends on the period for which you stayed invested in the scheme – the holding period. The tax rates are as follows:
Long Term Capital Gain (LTCG) – A holding period of more than one year. There is no tax on LTCG of up to Rs. 1 lakh. Above this amount, LTCG is taxed at the rate of 10% without the benefit of indexation.
Short Term Capital Gain (STCG) – A holding period of up to one year. STCG is taxed at 15%.
Dividend Distribution Tax (DDT)
As mandated by SEBI, all fund houses deduct a DDT of 10% before paying out dividends to unitholders.
Long Term Investment:
Many Index funds always are beneficial for the long run as the Index takes time to move bullish in the market and maintain it in long run with all the crash and economic crises. This Investment may have fluctuations and Volatility in a short period, so this is not recommended for Short-term and Medium-term Investors.
Advantages of Index Mutual Funds
- Index mutual funds provide good returns compared to large-cap mutual funds. This scheme is a combination of Small-cap, Mid-cap, Large-cap companies. stocks with the same proportion and composition of the Index followed in the stock market.
- Index mutual funds invest money in Small-cap, Mid-cap, and Large-Cap companies that will perform along with the market sentiments.
- Index mutual funds are having a very low expense ratio in the mutual funds.
- Index mutual funds are managed by professional fund managers and research analysts they just need to buy the company stocks which match the particular Index and track the Index in the market and make sure it is following the Index with accuracy.
Disadvantages of Index Mutual Funds:
- Index mutual funds are not suitable for short term Investors.
- Index mutual funds are based on a few stocks which run Index so there are chances of missing some potential stocks which can give good returns in the short run.
- Index mutual funds provide less returns compared to Small-cap and Mid-cap mutual funds.
- Fund managers of Index mutual funds must follow policies and strategies that require them to attempt to perform in lockstep with an index, they enjoy less flexibility than managed funds. Investment decisions on index funds must be made within the constraints of matching index returns.
Top 5 Index Mutual funds:
1. TATA Index Sensex Fund:
Fund size : Rs. 27 Cr
1 Yr Return : -1.94% PA
3 Yrs Returns : 23.28% PA
5 Yrs Returns : 51.51% PA
10Yrs Returns : 92.14% PA
NAV as on 28-Sep-2020 : Rs. 94.02
Expense Ratio : 1 %
2. HDFC Index Sensex Fund:
Fund size : Rs. 1,454 Cr
1 Yr Return : -1.90% PA
3 Yrs Returns : 5.94% PA
5 Yrs Returns : 13.42% PA
10Yrs Returns : NA
NAV as on 28-Sep-2020 : Rs. 338.7
Expense Ratio : 0.3%
3. Nippon India Index Fund:
Fund size : Rs.96.94 Cr
1 Yr Return : -1.72% PA
3 Yrs Returns : 22.30% PA
5 Yrs Returns : 49.15% PA
10Yrs Returns : 87.71% PA
NAV as on 25-Sep-2020 : Rs. 18.79
Expense Ratio : 0.42%
4. IDFC Nifty Fund:
Fund size : Rs. 232.67 Cr
1 Yr Return : -1.30% PA
3 Yrs Returns : 18.57% PA
5 Yrs Returns : 51.11% PA
10Yrs Returns : 105.73% PA
NAV as on 25-Sep-2020 : Rs. 23.57
Expense Ratio : 0.30%
5. UTI Index fund:
Fund size : Rs. 2,718 Cr
1 Yr Return : -2.01% PA
3 Yrs Returns : 17.83% PA
5 Yrs Returns : 50.36% PA
10Yrs Returns : 96.30% PA
NAV as on 25-Sep-2020 : Rs. 73.95
Expense Ratio : 0.14%
Disclaimer: All the above informationis for educational purposes only, and the mutual fund’s companies shown are not considered as recommendations as the above data might vary from actuals in the period. kindly read the scheme and policy-related documents carefully before investing in any mutual funds and visit the official website for more information.
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