Equity investing can be daunting for every investor, yet it could be highly fruitful. One of the hardest parts of investing in equities is picking the right stocks. You have to ensure the investments you choose are according to your goals and risk appetite, and at the same time, they should have plenty of growth potential too.
But this could be a difficult process, especially if you are a beginner, as it requires more stock market knowledge.
But what if there is a list of top stocks that you could invest in? Better yet, what if there is a fund that invests in these top stocks? That is exactly how index funds work. Let us learn more about index funds and see if it is the right time to invest in them.
What are stock market indexes?
A stock market index is like a tracker that tracks the performance of the whole stock market or a particular index. To achieve this, indexes track the performance of the top stocks in the stock market or specific sectors. The idea is that the leading companies’ performance often represents the index’s performance.
For example, if an index tracks the IT sector, it will contain the best stocks in that particular sector.
Two stock market indexes track the performance of the whole stock market in India – The nifty and Sensex. These indexes have the top companies in India in their composition. Hence, its performance is often indicative of the stock market’s general performance.
For instance, if the Nifty or Sensex is rising, it is often viewed as a general market uptrend and vice versa.
How is investing in stock market indexes beginner friendly?
Nifty and Sensex, the top stock exchanges in India, have grown over 70% in the last five years. Investing in them is a good way to earn from the growth of the stock markets.
If you want to invest in the growth of the overall stock markets, you could invest in a stock market index like Nifty or Sensex. If you’re going to take advantage of the growth of a particular sector, you could invest in an index like Nifty IT, which tracks a specific index.
How to invest in an index?
We have discussed above how beneficial investing in an index could be. But how do you go about investing in an index? The default option is to invest in stocks that the index consists of. But this could be disadvantageous in many ways. Firstly, you will have to manually monitor and make changes whenever there is a change in the index. Secondly, the cost associated with investing in each stock could be higher. Depending on the index, it could cost you more than a lakh rupees to buy a single supply.
Investing in a fund that tracks the index here could be a good choice. That is exactly what index funds do.
What is an index mutual fund?
An index fund is a mutual fund that invests in a portfolio similar to the index it follows. An index fund aims to track its performance as it is and not to outperform the same.
Index funds are a great way to invest in stock market indexes as it make investing easier. The fund manager will take care of the financing, and your job is limited to choosing the fund to invest in.
Index funds are a helpful way to invest in indexes. At the same time, its returns could be slightly different than the index growth as there could be factors like expense ratio.