Money
What Is an Index Fund — and Why Do Millions of People Invest in One?
Putting money into a single company is like betting everything on one cricket player — but index funds let you back the whole team at once, at very low cost.
0.1%Typical annual expense ratio of an index fund in India
The facts
- 1An index fund is a collection of many stocks that mirrors a market index, such as India's Nifty 50, which tracks the 50 largest companies listed on the National Stock Exchange (NSE).
- 2Because an index fund simply copies an index instead of hiring analysts to pick stocks, its annual fee — called an expense ratio — is often below 0.1%, compared to 1–2% for many actively managed funds.
- 3SEBI, India's markets regulator, requires mutual funds to clearly display their expense ratios so investors can compare costs before choosing a fund.
- 4Over any rolling 15-year period tracked by SPIVA India data, more than 70% of actively managed large-cap funds have underperformed the Nifty 100 index — meaning the 'boring' index often wins.
- 5Investing a fixed amount every month regardless of market conditions is called a Systematic Investment Plan (SIP); it averages out the cost per unit over time, reducing the risk of buying at a peak.
Why it matters
Most Indian families keep savings in fixed deposits, but with inflation often close to FD returns, wealth barely grows in real terms. Index funds offer a low-cost way to participate in the broader economy's growth — but they still carry market risk, meaning prices can fall in the short term. Understanding the tradeoff between risk and long-term return is one of the most important financial skills a young person can build.
Sources
- SEBI (Securities and Exchange Board of India)
- SPIVA India Scorecard by S&P Dow Jones Indices
- National Stock Exchange of India (NSE)
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