What are the advantages and disadvantages of an index fund? Do they give superior returns than diversified equity funds?
- Chandramouli Patel
The advantage of an index fund is that you are assured of replicating the index. You choose to be an average, which an index is. The other advantage is its low cost. But the disadvantage is that you give up the prospect of beating the index, which I think is an aspirational thing for most equity investors.
In 2018 and 2019, many funds were unable to beat the index. But that is on an annual basis if we look at five-, seven- and ten-year time frames, and analyse regular investments or SIPs - most funds are able to beat the index by a wide margin. The ability to beat the index by a wide margin on a five- or ten-year basis actually makes you wealthier.
To summarise, low cost and getting the average index return are the advantages, while losing the opportunity of earning more than the index is a disadvantage.