Index funds are created to replicate the performance of a specific market index. An index fund’s portfolio can contain either stocks or bonds and the strategies employed by these mutual funds to obtain returns in line with their chosen index differ.
In India, passive investment is gaining popularity. Many investors today believe that investing in an index fund or exchange-traded fund (ETF) is the most cost-effective and hassle-free way to build long-term wealth. Their performance appears to have convinced a lot of investors about the invincibility of passive strategy in India.
Have a look at some of the pros and cons of these index funds-
Pros of Index Funds–
- Steady Growth with slow risk–
- Index funds have the advantage of being relatively low-risk investments in equity and bonds that are geared for consistent, long-term growth.
- They are naturally diversified, covering a wide range of industries inside an index, which protects against heavy losses. They also outperform the majority of non-index funds that try to outperform the market.
- Lower Fees-
- Investors can save money by investing in index funds rather than non-index funds. It means that even if a non-index fund outperforms index funds, it must outperform them by a specific margin to earn returns that cover its expenses.
- One explanation for the higher costs is that actively managed funds have a lot more transactions than index funds, which passively traded because they follow an index.
Cons of Index Funds–
- Lack of Flexibility-
- Index fund managers have less flexibility than managed funds since they must follow policies and procedures that force them to try to perform in lockstep with an index.
- If an index’s returns are rapidly dropping, index fund managers have few choices for limiting such losses.
- Managers of actively managed funds, on the other hand, have more flexibility to intervene in good or bad times to locate better-performing solutions.
- No Big Gains-
- Index fund managers have less flexibility than managed funds since they must follow policies and procedures that force them to try to perform in lockstep with an index.
- If an index’s returns are rapidly dropping, index fund managers have few choices for limiting such losses.
- Managers of actively managed funds, on the other hand, have more flexibility to intervene in good or bad times to locate better-performing solutions.
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