Index funds are the type of mutual funds which invests in stocks of a market index. The composition of the portfolio is exactly the replica of an index in term of weight age and stocks. Hence, the return from index funds will be in the same line of the index. In this post, we look at various options on how to invest in Index Funds in India.

Features of Index Funds

• Passive Investment: Index funds are passively managed funds meaning the fund manager has little role in the management of the fund and the role is limited to tracking of the composition of the fund.

• Diversified Fund: As index funds capture the broad market exposure of an index. The fund portfolio represents the top companies by the market capitalization in different sectors.

• Low Fees: Passive management feature of the fund helps in reducing the management fees and other overhead cost resulting in less expense ratio of the fund

• Tracking error: The index funds are subject to tracking error. It means how much the return on the fund is deviating from the return of an index. It happens because of changes in constituents of the index, inflow/ outflow of funds etc.

Analysis of Index Funds

Analysis of index funds doesn't require deep digging of the fund's performance or portfolio composition. But there are few factors which affect the performance of the fund that should be looked upon for determination of the future performance of fund following points should be checked.

* Sector weight age: It is important to know which sector has maximum influence on the fund and to what extent it is going to effect it. We should calculate the contribution of each sector of the fund by multiplying the sector weight by the sector return

• Expense ratio: We should check for expense ratio for the fund. Index fund being passively managed should not have high expense ratio. Generally, it should be less than 1%.

How the fund has performed over long term?

We should check the tracking error of the fund. Tracking error means the difference between a portfolio's returns and the index. High tracking error means the fund is deviating from its portfolio and should be avoided.

How to invest in Index Funds?

There are multiple ways, an investor can opt for investing in Index Funds:

• Online Portals

• Agents

• Demat Account

• AMC Website

Online Portals

With the advent of Robo-advisors, investment in mutual funds are more efficient and focussed towards achieving financial goals more effectively. It uses set of algorithms, data analysis in suggesting the right fund to investors. Some pros and cons of Online portals are:

Pros

• Low fees with high-quality investment service

• Covers broader area of investment service.

• Ease of use with interactive platform.

Cons

• Less personalized service.

• Based on algorithm and data analysis, it offers passive investment advice.

Agents

These are Independent financial advisor (IFA), helps an investor with managing financial goals, investment needs, recommends mutual funds and finally helps to buy them. Investing through IFA is ideal for investors who don't have knowledge of financial planning. Some pros and cons of IFA are:

Pros

• Effective recommendation on basis of investor profile.

• Personalised services.

Cons

• Doesn't offer Direct funds.

• Charge commission from customer on managing their financial needs.

• High chances among adviser about inadequate information about products.

Demat Account

One can invest in mutual funds through the Demat account also. Your online portal or an agent can open an demat account as well for your investments. Some pros and cons are:

Pros

• Convenient and paperless transaction.

• All units are held electronically.

• Easy nomination filings.

Cons

• Charges on investing through Demat account are high

• All funds are not available.

• No financial advice to investors.

AMC Website

One can invest in their pre-selected funds through official website of Asset management company. Pros and cons of investing directly through AMC are:

Pros

• Access to direct plans of the funds.

• Convenient form of investing as it does not require paperwork and KYC is done digitally.

• Low cost

Cons

• Have to visit different website for different AMC.

• Have to depend on self for selecting funds and formulating financial goals.