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Index ETFs are ETFs that imitate a stock market index
As the name suggests, an Index ETF invests in stocks that imitate a stock market index like the NSE Nifty, BSE Sensex, etc. These are passively managed funds which means that the fund manager invests in the same securities as present in the underlying index in the same proportion and doesn’t change the portfolio composition. These funds aim to offer returns comparable to the index that they track.
Let’s say that an Index Fund is tracking the NSE Nifty Index. This fund will, therefore, have 50 stocks in its portfolio in similar proportions. An index can include equity and equity-related instruments along with bonds. The index fund ensures that it invests in all the securities that the index tracks.
Since Index Funds track a market index, the returns are approximately similar to those offered by the index. Hence, investors who prefer predictable returns and want to invest in the equity markets without taking a lot of risks prefer these funds.
Risks and Returns
Since index funds track a market index and are passively managed, they are less volatile than the actively managed equity funds. Hence, the risks are lower. One component that needs your attention is Tracking Error. Therefore, before investing in an index fund, you must look for one with the lowest tracking error. Higher AUM is also a proxy of low volatility and hence lower tracking error
Expense Ratio is a small percentage of the total assets of the fund charged by the fund house towards fund management services. One of the biggest USP of an index fund is its low expense ratio. Since the fund is passively managed, there is no need to create an investment strategy or research and find stocks for investing. This brings the fund management costs down leading to a lower expense ratio.
You will need a demat account to invest into ETFs. You can invest using Niyo Money Stocks & ETFs feature once your demat account is active.
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