They are as safe as the underlying index, says Dhirendra Kumar
How safe are index funds? Can we make any money by investing in these funds? Also, when it comes to liquidation, are these funds as good as liquid funds?
Index funds are as safe as the underlying index. The markets are volatile and as you have seen that this volatility immediately reflects in index funds. So, in that sense, these funds are as safe as the market. It is an instant unmanaged diversified way of investing in the markets. There are plenty of index funds available. But the dominant Indian indices in which you can invest are the Nifty and Sensex.
If you are investing in an index fund, you always have ready liquidity based on its NAV. Mutual fund companies honour all redemptions based on that day's NAV.
However, if you are investing in an index ETF, the story is slightly complicated. You buy an index ETF based on the availability in the market. When you buy it from the market, it is not always available at the NAV - sometimes it's lower or higher than its NAV. But the Sensex and Nifty have reasonable liquidity because the underlying is also very liquid.