Index Funds as the name suggest are based on an Index . Now what is an Index, Well Nifty ( NSE Index ) and Sensex (BSE Index ) are two well known Indexes( or list of companies ) in India.
Index funds are also called Passive Funds , that is because the fund manager who manages these fund is not suppose do anything other than just follow the Index , that is, he is suppose to buy shares of only those companies which are in the Index and in exactly same ratio as they are in the Index.
Since the fund manager is suppose to just follow the index , fund management charges are suppose to be the lowest of all types of mutual funds schemes.
It has been found that in developed countries, investment in Index funds have returned far superior returns compared to the investment in a diversified equity fund . But this trend has not been seen in India , as we find many diversified equity fund manager out performing the Index. As India becomes more and more of a matured market , we may see this trend in India too .
Tracking error is a term used with Index Funds , which indicates , how much is the return from a Index fund different from the Index itself . Smaller the tracking error better is that fund
So investing in Index fund may be a lazy way of investing , but in mature markets it has done wonders.
Image : FreeDigitalPhotos.net,Photographer: graur codrin
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