Index Funds - Myth Busters
What are Index Funds?
Index funds invest the money in the chosen index say SENSEX / NIFTY 50, etc. They just mimic the index stocks & their proportions - there is no active fund management done by the mutual fund company.
Are Index Funds safe & guaranteed?
Index funds also invest in shares & hence the returns are subject to market risks as with any other fund. The returns are NOT GUARANTEED - Ex. during Covid, it is Sensex / Nifty that fell over 50% & hence index funds also would fall to the same extent.
But they are top companies of India & are blue chip stocks?
The stocks in the index gets changed semi-annually based on their market value. Barring 7 to 9 companies, the other 40-odd companies have kept changing periodically in the Nifty to index. A blue chip stock does not always remains a blue chip stock. Remember: Yes Bank, Suzlon, Reliance Communications, etc.
Ok - I hear that Index funds will get more returns than other funds?
Again - it is partially true / partially false. Every fund goes through a cycle & will have its ups & downs. Actively managed funds have always beaten the index, especially in the mid-cap, small-cap & multi-cap segment. In the other segments, it is a mixed bag & keeps altering. In the large cap segment, perhaps index funds have a slight upper hand! India being a growing economy, has a lot of scope for stock picking & hence potential to deliver better returns than the index.
Some times the index will bleed more too as in the recent case of Adani stocks crash since it was part of all major indices, but almost none of the actively managed funds were holding these stocks.
Fund Management Cost is low in Index Funds?
YES - it is true as there is no active fund management & hence the cost is lower when compared to actively managed funds. But that should not be the sole reason to opt for any fund or any product. In any mutual fund, the fund management charges are deducted from the daily NAV & hence the returns that you see is what you will get too, which is post the expenses.
So, should I avoid Index Funds completely?
NO - they can be one-part of the portfolio. Absolutely no issues. But be clear on the myths behind them & the euphoria created in various media portraying them as "THE SOLUTION" to invest in markets.
Always remember, have a diversified portfolio of funds that invest across market caps & investment styles & across few fund houses. Continue the process for long-term; we will always miss out on few opportunities. That is ok - as long as we don't make grave mistakes in our investments, we will end up building peaceful wealth.
