Why Should Rookie Investors Look For Index Fund For Investment?
Mutual funds investments do not offer guaranteed returns. But they carry a high risk rewards ratio which is what makes them one of the most sought after investment schemes. They are a pool of professionally managed funds that invest across various asset classes for income generation. Depending on the nature of the scheme and its risk profile a mutual fund may invest in company stocks, equity markets, debt instruments like debentures, company fixed deposits, etc. Asset Management Companies owning mutual funds collect money from investors sharing a common investment objective and invest this pool of funds across the Indian and foreign economy. Depending on the nature of the scheme and its investment objective a mutual fund may diversify its portfolio with different types of securities.
There are multiple mutual fund schemes to choose from. This can be a good thing but for someone who is entirely new to financial planning or mutual fund investing, navigating through multiple schemes in order to determine the right scheme for their financial goals can become a tad difficult. Several mutual fund advisors recommend investors to first make a list of their short term and long term goals so that they use the right set of mutual fund schemes to specifically target these goals. Having said that mutual fund investments do not guarantee returns, but these modern investment avenues have provided far better returns as compared to traditional financial schemes.
Market regulator SEBI has further categorized mutual funds for investors to be able to take an informed investment decision. This categorization takes place based on certain unique attributes of a mutual fund scheme including its risk profile, investment objective, asset allocation strategy, fund size, etc. Some of the major mutual fund categories include equity, debt, solution oriented, hybrid, ETF, gold and index funds.
What are index funds?
In an index funds, a minimum of 95 percent of the corpus is always invested in the securities of the underlying index. This kind of mutual fund investments exactly suits an investor who is investing for a longer period. So, if your investment goal is long term your financial expectations could be aligned with the objectives of an index fund. Index funds can be good choice for ‘know-nothing investors’ (as quoted by Warrant Bates) who want to invest in the stock market but do not know how to go about it. Also, they are generally preferred by seasoned investors who want to diversify their financial portfolio and have a long term investment horizon.
Benefits of index funds
The beauty of index fund investments is that investors have multiple options of making payment. You can go the traditional way and make a one time lumpsum investment. A lumpsum payment towards an index fund is made right at the beginning of the investment cycle. Investors are allotted units in quantum with the investment amount and depending on the fund’s existing NAV (net asset value). However, when you make a lumpsum investment you end up exposing your entire investment amount to the dangers of equities right from the beginning. If you do not have a large capital at your disposal, you can still invest in mutual funds thanks to a more convenient investment option like SIP. A Systematic Investment Plan or SIP is an easy and hassle free way to invest in index funds. Investors can invest small amounts at regular intervals instead of making a lumpsum investment. One can even refer to the online SIP calculator in order to determine how much money they need to invest at periodic intervals in order to achieve their life’s ultimate financial goal.
