Index Funds: The best investment option for first-timers, says Porinju Veliyath

Index Funds Investment: If you're new to equity investing, index funds can be ideal choice, with potential to surpass or asset classes in long run.

In a conversation about future of investing, Porinju Veliyath, Founder, Equity Intelligence and renowned investor stressed that Index Funds are best choice for beginners looking to invest in stock market.

With Indian economy on verge of major growth, he believes that investing in index funds will not only provide stable returns but will also outshine or asset classes in long run.

"I think an index fund investing will really help. It's going to create superlative return than any or asset class index fund for that matter," Veliyath told Republic Money at India Economic Summit held at Republic's National Hequarters.

His remarks come at a time when mutual fund investments are on rise, with SIP contributions crossing Rs 25,000 crore per month, signaling a shift in India's investing sphere.

Index Funds offer a low-cost way to invest in stock market with predictable returns, diversification, and minimal risk. y are particularly suited for long-term investors looking to mirror overall market performance without getting involved in stock-picking.

What are index funds?

An Index Fund is a of mutual fund that aims to replicate performance of a market index, such as NSE Nifty or BSE Sensex. se funds are passively managed, meaning that fund manager invests in same stocks as those in underlying index and in same proportions. Unlike actively managed funds, where a fund manager picks stocks based on predictions and strategies.

Index Funds simply track performance of index y follow. ir goal is not to outperform market but to provide returns that are consistent with market index y are replicating.

For instance, if an Index Fund tracks NSE Nifty 50, it will invest in 50 stocks that are part of index in same proportions. fund’s performance, refore, mirrors movements of Nifty 50, aiming to match its returns.

What defines your returns?

When you invest in an Index Fund, you are essentially buying a small share in all companies that make up index. performance of fund is tied to performance of se companies. If index goes up, so do your returns; if it drops, so do your returns.

For example, a fund that tracks NSE Nifty will hold stocks like Reliance Industries, HDFC Bank and Infosys , proportionally aligned with ir weight in index. Broer indices, like Nifty Total Market Index, may include a wider range of stocks, sometimes up to 750, encompassing companies of all sizes from various sectors.

Benefits of Index Funds

Index Funds offer several key vantages, including low costs due to ir passive management style, which results in lower expense ratios compared to actively managed funds. y provide instant diversification by tracking a bro market index, like Nifty 50, spreing investments across various sectors, and reby reducing risk.

Since y aim to mirror performance of index, Index Funds offer predictable returns, making m suitable for long-term investors. ditionally, y tend to be less volatile than actively managed funds, as y don’t rely on stock picking, making m a straightforward and easy-to-understand investment option, especially for beginners.

Risks to consider

While Index Funds are generally low-risk compared to actively managed funds, y do come with certain risks as y track market, if market as a whole goes down, so will index and your investment.

Tracking error is difference between performance of an index fund and index it tracks. For example, if Nifty 50 Index grows by 10% in a year, you would expect your index fund to grow by same amount. However, if fund only grows by 9.5% or 10.5%, difference (0.5%) is tracking error.

A low tracking error means fund is closely following index, while a high tracking error indicates a larger gap between fund’s performance and index’s performance. Ideally, you want a fund with a minimal tracking error for better alignment with index.

Who should invest in Index Funds?

Index Funds are suitable for long-term investors who are looking for consistent returns over time. Investors who prefer low-cost options and are not looking to pay high fees for actively managed funds. Those who want diversification without having to pick individual stocks. Risk-averse investors who prefer stability of market averages.

Things to keep in mind before Investing in Index Funds

When investing in Index Funds, focus on selecting funds with low tracking error and expense ratios to ensure y closely follow index. Stay invested for long term to ride out market fluctuations, as se funds perform best over time.

ditionally, include Index Funds as part of a diversified portfolio by balancing m with debt funds or gold. If you're concerned about market timing, consider using Systematic Investment Plans (SIPs) to invest regularly, spreing your investment over time and minimising short-term volatility.