Investing in the stock market is not at all an easy task, especially for beginners. However, with the rise of index funds in India, investing in the stock market has become a lot easier and accessible to the masses. The biggest advantage to people willing to invest their money for capital appreciation is that there is no entry barrier. In this comprehensive blog, we will discuss everything you need to know about investing in index funds in India.
What are Index Funds?
These are a category of mutual funds that tracks any specific stock market index. The index fund invests in the same stocks that encompass the index, in the same proportion. Index funds are passive investments as they do not try to outperform the market, but rather mimic the market. This means that the performance of an index fund will be very similar to the performance of the index it tracks. Its deviation from the index it tracks is called tracking error. It is inevitable but should be as minimum as possible.
What are Index ETFs?
ETFs or Exchange Traded Funds are a type of investment asset, which tracks any stock market index just like Index Funds. The only difference is it can be bought or sold just like stocks on stock exchange, are easily tradable and has lesser fees. It helps in making investments in many securities (here stocks), which are part of the index, at once in a singular entity. These are a must have investment from major stock market courses online with certificate.
Let us understand Index ETFs through an example:
Consider an Index as a river and the constituents of the index as the composition of water. When we take a bucket of water out of the river, the constituents and the composition of water remains same as of the river. Similarly in ETFs, the amount is distributed in a similar proportion to that of the Index. Essentially, Index ETFs are a smaller version of the Index it follows. This example is widely taught to simplify Index ETFs in our stock market institute In Noida.
Why Invest in such instruments?
The answer to this question lies in the following situational case, taught in stock market institute In Noida.
Let us assume you have invested in 3 sectors with 1 stock investment in each of them. For a complete year, if these stocks remain in consolidation, you would not be able to bear the emotional pressure, the bull run would have created. When one sees the Index going up almost everyday with stocks making rally, thoughts of selling your portfolio and buying the rallying stocks will fill up your mind. Index Funds are the solution to such worries.
To capture the bull run of the market, without investing into all the stocks which comprise the Index, investing in Index Fund or Index ETFs is a better solution. Therefore, it is an integral part of the stock market courses online with certificate. Often the best stock market courses recommend having at least of 50% exposure of the investment portfolio to the Index investments. One can also make their Index investments using Index Funds or ETFs through Dow Theory. Many stock market training institutes deem it to be the best diversification tool for investments.
Making investments in index funds in India has two more advantages over actively managed funds, apart from the one mentioned above. Firstly, index funds and ETFs have lower expense ratios compared to actively managed funds. This means that investors must pay lesser charges and commissions. Secondly, index funds have a lower turnover rate, which results in lesser capital gains taxes.
What is better?
The decision to go for an Index fund in India or Index ETFs solely depend upon two things:
- How much time you will be able to give to monitor these investments?
- How long do you wish to hold this investment?
If you are someone who has the time to watch for the indices and respective investments charts at the end of the week and take actions of buy and sell on Monday mornings, then you could go with the ETF investments. Also, it is more suited for the people who are looking to invest for less than 10 years. The best stock market training institutes vouch for this investment asset.
On the other hand, if you do not have time to watch the Index charts, you can opt for Index funds in India whose expense ratio and exit load is lesser and AUM is more. If someone wants to invest for more than 10 years and does not want to do frequent buying and selling, they can go with Index Funds Direct plans with regular periodic SIPs.
How to buy Index ETFs?
Investing into Index ETFs are as simple as putting butter on bread. Here are the steps which need to be followed by you for making investments in an Index ETF.
- Choose a Broker
Most importantly you chose a broker for yourself, who would facilitate transactions with the exchange on your behalf. So, choose a full-time service broker like Ange One or Zerodha. If they provide discount broking solutions, with the best and recent technology, then it is a jackpot.
- Open your Demat Account
After choosing a broker, open a demat and trading account with them. Make sure that you know of their brokerage plan, so it would not result in abnormal brokerage. Get proper knowledge of order placements through the customer portal or their YouTube playlist or through stock market courses for beginners free.
- Select the Index and its respective ETF
Decide the Index you wish to invest into and apply Dow Theory learnt from stock market courses online with certificate on it. If you find a buy signal in it, simply find its respective ETF, and select two by checking for two parameters- most actively traded and least expense ratio.
- Place the order
If you find that the Index has generated a buy signal at this week’s close, then you buy its respective ETF on Monday on Delivery. After the order placement you hold this investment until the sell signal arrives. The monitoring of these investments is to be done on a weekly close basis.
How to Invest in Index Funds in India?
Investing in index funds in India is an even simpler process. Here are the steps you need to follow to invest in index funds:
Step 1: Choose a Broker
The first step in investing in index funds is choosing a right broker for yourself. There are several brokers in India that offer index funds, including ICICI Direct, Axis Direct, HDFC Securities, and Kotak Securities. Choose a broker that offers the index fund you want to invest into. You can take help of this video from our share market training in Noida to figure out the best Index fund in India for you, here:
Step 2: Open a Demat Account
Once you have chosen a broker, you need to open a Demat account. A Demat account is an account that holds your shares in electronic form with a depository – CDSL or NSDL. You can open a Demat account online or even by visiting the broker’s office. You can even take help of even online share market courses for the same.
Step 3: Select an Index Fund
After opening a Demat account, you need to select the index fund in India you wish to invest in. There are several index funds available in India, including Nifty 50, Sensex, Nifty Next 50, and other sectoral indices. Select an index fund that matches your investment goals and risk profile.
Step 4: Invest in your selected Index Fund
Once you have chosen your desired index fund, you can invest in it through your broker’s online platform. You can invest a lump sum amount or set up a Systematic Investment Plan (SIP) to invest a fixed amount at regular intervals or even both to proceed with that investment.
Best Indices for Index Funds and ETFs
Here are some of the best indices in India that you can consider investing in:
- Nifty 50 Index – This index is a weighted average of 50 stocks. Both ETFs and index funds are available for this index.
- Sensex Index – This index is a weighted average of 30 stocks. Both index funds and ETFs are available for this index.
- Nifty Next 50 Index – This index is a weighted average of next 50 stocks in Nifty. Both index funds and ETFs are available for this index.
- Shariah: This is the index which is in accordance with the Islamic law of investing. Both ETFs and index funds are available for this index.
- Sectoral Indices: There are many sectors which you can invest into, like IT- Pharma, Infrastructure, Banks etc. You can invest into them using Index Funds and ETFs whichever are available.
- US market Indices: Although entire replication of the US indices is available only with a few AMCs, but these are now also available in the market in the form of Index Funds and ETFs.
If you are interested in learning more about the stock market and investing, there are many best stock market courses available in Noida. You can check out one of the best stock market training institutes in Noida that offer stock market courses for beginners free and paid too, here: https://goelasf.in/isma