Index Funds invest in a market index such as the Nifty or the Sensex, buying all the stocks in those indices in their respective weights. The idea behind index funds is the failure of actively managed funds to beat indices over the long term. This is true in the USA but the evidence is much less clear in India. In fact, investing in any of the 10 largest actively managed equity funds in India would have given you 1.5 times the return of the Nifty over the last five or ten years.
On the other hand actively managed funds come with expense ratios of 2-2.5% compared to 1% or less for index funds. These expenses tend to eat into your returns over the long term. Big institutions such as the Employees Provident Fund Organisation (EPFO) also invest through index funds rather than actively managed funds. Active outperformance is also associated with young, developing markets. As markets mature, the outperformance of active managers may wither away. India may well be approaching exactly this sort of stage in its own markets.
So should you switch from active funds to index funds? Just how good are index funds? We give you some answers in our next Money Hangout.
Should you invest in index funds?
Date: Friday, May 19, 2017
Time: 12:30 PM - 1:00 PM
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