Index Funds

The underlying objective is to achieve proportionate performance from the fund as the selected market index is delivering in the market. You could say an Index Fund “tracks” the performance of the market index built on. Hence, they are also called “Index Tracking Funds.”

You Don’t Intend to Buy/Sell Frequently.
Index mutual funds are a passively managed entity that does not involve much buying and selling, as they track a particular market index. If you seek to build a portfolio with fewer trade instances, then opting for index mutual funds would be the right choice.

You Want Better Portfolio Exposure
Index mutual funds invest your corpus in the stocks listed on an index for emulating it – the index could have 50 stocks or 500 stocks). This gives an opportunity of diversifying your investment portfolio by selecting a market index that features the industry stock you wish to include in your portfolio.

You Seek a Low-Cost Investment Option
Index mutual funds are also called “Low-Cost Funds” because your fund manager doesn’t actively have to decide your money. Less buying and selling is involved, and the portfolio composition also doesn’t change much over the investment period. This makes index mutual funds trade at lower costs than actively managed funds.

You Have Low Appetite for Risk
Index funds are typically low-risk funds because of the diversity of investment constituted in them. If you wish to invest in equities but with lesser risk, invest in index mutual funds.

Index funds are highly diversified and designed for low-cost, proportionate investment in the same stocks that appear on the chosen market index.
A funds manager manages index funds. However, his only role is to select the stocks according to the underlying index to match the portfolio.
Returns from an index fund are more or less similar to the returns from the underlying market index; it is the primary objective of an index fund – to match the returns to the index it imitates.
Diversification does absorb some risk inherent in index funds. However, it largely depends on the volatility of the assets listed on the index that the fund is based on.

Capital Gains Tax
When you register capital gains from selling off your index fund stock, you become liable for capital gains tax on the profits thus earned. There are two tiers of capital gains tax:

Short term gains, where you held the stock for less than 12 months. CGT, in this case, is as follows:
For listed domestic shares, 15%.
It is as per the income tax slab rate for unlisted domestic shares held up to 24 months.
For foreign shares held up to 24 months, it is as per income tax slab rate.
Long term gains, where you held the stock for 24 months or above. The CGT, in this case, is as follows:
For listed shares held for more than 12 months, for long term capital gain exceeding ₹1 lakh in one FY, it is 10%.
For unlisted shares held for more than 24 months, it is 20% with indexation.
For foreign shares held for more than 24 months, it is 20% with indexation.

No Downhill Assistance
Since a market fund closely follows a particular market index, things go well while the index performs well. However, the moment this performance begins to fall, index fund mutual funds provide no mechanism to reel in the snowball. You may consider hedge funds to control your losses, but effectively there are not many other viable options.

Absence of Modification Mechanisms
Market indices may sometimes have stock that is overvalued/undervalued. Index funds are designed to be proportionate to the weight of stock on an index, thus leaving you with no option to reduce your portfolio exposure to that fund despite knowing its true value.

Loss of Strategy
Managing funds through a manager brings the benefit of a sound strategy to an actively managed fund. However, index fund mutual funds are passive – it makes you lose out on the benefits of having an investment strategy in place for better gains.

The low-fee/low-cost model makes top index mutual funds a good option for many first-time investors since there is no decision-making involved.
Top index funds are like a package deal with automated investment packets that follow market indices. As such, index funds are free from human biases, favours, or disfavors, making them objective vehicles for investment.
Top index funds let the investor enjoy a vast portfolio with a single fund. For example, investing in the Nippon India Index Fund – Nifty Plan-Growth allows you to diversify your portfolio across 10+ industry sectors through 50 highly regarded stocks in the market.
Top index funds involve very little management – on your part and the fund manager’s – allowing them to be managed easily. Apart from periodically rebalancing your portfolio, there is little else that needs to be done.