{"id":2994,"date":"2021-06-29T16:45:57","date_gmt":"2021-06-29T11:15:57","guid":{"rendered":"https:\/\/blog.tickertape.in\/?p=2994"},"modified":"2021-06-29T16:59:50","modified_gmt":"2021-06-29T11:29:50","slug":"index-funds","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/index-funds\/","title":{"rendered":"What are index funds, and what are their types?"},"content":{"rendered":"\n<p>Investing in stocks has been one of the most popular investment choices to expand wealth. If you are new to investing or are a risk-averse investor, you are probably looking for low-cost investment options that offer stable returns. In such a case, <a href=\"https:\/\/www.tickertape.in\/blog\/stock-market-index\/\">index<\/a> funds can be a favourable option for you.<\/p>\n\n\n\n<p>The availability of a diversified portfolio of securities to choose from and the ability to <a href=\"https:\/\/www.tickertape.in\/blog\/why-should-you-prioritise-investing\/\">invest<\/a> in top-performing stocks make <a href=\"https:\/\/www.tickertape.in\/blog\/4-factors-to-consider-before-investing-in-index-funds\/\">index funds<\/a> quite popular among investors. The better the stock portfolio, the better will be the value and popularity of the index. But the question is, what are index funds?<\/p>\n\n\n\n<p><strong>This article covers:<\/strong><\/p>\n\n\n\n<ul><li><a href=\"#Index\">What is an index?<\/a><\/li><li><a href=\"#Funds\">What are index funds?<\/a><\/li><li><a href=\"#Proportion\">What does the \u2018same proportion\u2019 mean?<\/a><\/li><li><a href=\"#Types\">Types of index funds?<\/a><\/li><\/ul>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/index-funds\/#What-is-an-index\" title=\"What is an index?\">What is an index?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/index-funds\/#What-are-index-funds\" title=\"What are index funds?\">What are index funds?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/index-funds\/#What-does-the-%E2%80%98same-proportion-mean\" title=\"What does the \u2018same proportion\u2019 mean?\">What does the \u2018same proportion\u2019 mean?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/index-funds\/#Types-of-index-funds\" title=\"Types of index funds?\">Types of index funds?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/index-funds\/#Broad-market-index-funds\" title=\"Broad market index funds\">Broad market index funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/index-funds\/#Market-capitalisation-index-funds\" title=\"Market capitalisation index funds\">Market capitalisation index funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/index-funds\/#Earning-based-index-funds\" title=\"Earning based index funds\">Earning based index funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/index-funds\/#Bond-based-index-funds\" title=\"Bond based index funds\">Bond based index funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.tickertape.in\/blog\/index-funds\/#International-index-funds\" title=\"International index funds\">International index funds<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"Index\"><span class=\"ez-toc-section\" id=\"What-is-an-index\"><\/span><strong>What is an index?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Before understanding what are index funds, let&#8217;s first look at what an index is. There are thousands of stocks listed on a particular stock exchange. You can\u2019t track the performance of every stock and then choose the best one for your portfolio. This is where an index comes into play. An index is a portfolio of similar stocks forming part of a particular sector of the market.<\/p>\n\n\n\n<p>An index<strong> <\/strong>or indices help you make an informed decision about your investment by grouping a particular section of similar stocks. These stocks are selected based on <a href=\"https:\/\/www.tickertape.in\/blog\/market-capitalization\/\">market capitalisation<\/a>, size, earnings or the sector they belong to. For example, an index of the health sector will help you compare stocks of different health companies.<\/p>\n\n\n\n<p>Alternatively, we can say an index measures any changes taking place in the prices of such stocks. If a particular stock return is higher than the index\u2019s it means the stock is doing better than the index. However, if it\u2019s lower, then that stock has underperformed.<\/p>\n\n\n\n<p>In India, we have various types of indices like sectoral, broad-based and benchmark. BSE\u2019s <a href=\"https:\/\/www.tickertape.in\/blog\/sensex-companies\/\">Sensex<\/a> and NSE\u2019s Nifty are the two <a href=\"https:\/\/www.tickertape.in\/blog\/sensex-and-nifty\/\">benchmark indices<\/a> in India. You can invest in these indices through index funds.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"Funds\"><span class=\"ez-toc-section\" id=\"What-are-index-funds\"><\/span><strong>What are index funds<\/strong><strong>?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Index funds are a <a href=\"https:\/\/www.tickertape.in\/blog\/types-of-mutual-funds-a-quick-overview\/?ref=blog\">type of mutual funds<\/a> or <a href=\"https:\/\/www.tickertape.in\/blog\/etf-checklist\/?ref=blog\">exchange-traded funds<\/a> that comprise the same portfolio of stocks in the same proportion as available in the index they are tracking. In other words, instead of buying individual stocks, you buy all of the stocks of companies comprising the index through index funds and that too at low cost.<\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1100\" height=\"2977\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/06\/Index-funds-IG-01.png\" alt=\"\" class=\"wp-image-2995\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/06\/Index-funds-IG-01.png 1100w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/06\/Index-funds-IG-01-111x300.png 111w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/06\/Index-funds-IG-01-378x1024.png 378w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/06\/Index-funds-IG-01-768x2078.png 768w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/06\/Index-funds-IG-01-568x1536.png 568w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/06\/Index-funds-IG-01-757x2048.png 757w\" sizes=\"(max-width: 1100px) 100vw, 1100px\" \/><\/figure><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"Proportion\"><span class=\"ez-toc-section\" id=\"What-does-the-%E2%80%98same-proportion-mean\"><\/span><strong>What does the \u2018same proportion\u2019 mean?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In an index, each stock or security is assigned a certain weight implying that the <a href=\"https:\/\/www.tickertape.in\/blog\/index-funds-2\/\">index fund<\/a> tracking that particular index will also hold the security in exact proportion. For example, if company \u201cA\u201d is allocated 5% in Sensex then the index fund<strong> <\/strong>tracking the Sensex will also hold 5% in company \u201cA\u201d.<\/p>\n\n\n\n<p>Since index <a href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/\">mutual funds<\/a> mirror the underlying index at all times, be it the selection of stocks or their weightage, their returns also correlate with the return of the index. So for example, if the Nifty rises by 10% then the index fund following Nifty will also roughly see an increase of 10%.<\/p>\n\n\n\n<p>These are like passive mutual funds, designed to simply follow the index they are tracking irrespective of how the market performs. The goal of index funds is to outperform each stock in the long run.<\/p>\n\n\n\n<p>The index mutual funds are a good choice for beginner investors or even learned investors who want to invest for the long term. Let\u2019s discuss different types of index mutual funds which you can choose from.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"Types\"><span class=\"ez-toc-section\" id=\"Types-of-index-funds\"><\/span><strong>Types of index funds<\/strong><strong>?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Contrary to popular belief, there are many index funds available in the market. You can analyse various index funds in India and then choose the one that perfectly fits your financial goal. The different types of index funds are:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Broad-market-index-funds\"><\/span><strong>Broad market <\/strong><strong>index funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>As the name suggests, these index funds represent the stocks of the broad market. Whenever you want to invest in multiple sectors like technology, health or finance, you can choose the <a href=\"https:\/\/www.tickertape.in\/blog\/mitigating-portfolio-risk-through-diversification\/\">diversification<\/a> process of broad market index funds. You get access to top stocks from different sectors at a low cost and if one sector underperforms then other sectors can balance their losses, hence reducing the overall risk.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Market-capitalisation-index-funds\"><\/span><strong>Market capitalisation <\/strong><strong>index funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Some index mutual funds are based on the individual company\u2019s market size, which is calculated by multiplying the company\u2019s price per share with the number of shares outstanding. There can be largecap, midcap, and smallcap companies. This fund is suitable if you can hold your investments for a longer duration. By doing this, you give the smallcap and midcap stocks, and, in turn, your ETFs ample time to grow.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Earning-based-index-funds\"><\/span><strong>Earning based <\/strong><strong>index funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>There are 2 types of index funds based on profit and earnings: growth index and value index. Growth indices indicate companies that are growing faster than the overall market, while value indices are representative of companies that are trading at a value lower than the company\u2019s earnings.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Bond-based-index-funds\"><\/span><strong>Bond based <\/strong><strong>index funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>These funds involve a portfolio with fixed maturity terms. These are suitable for those looking for safe and low-risk investments in the long run. The best way to get maximum return with <a href=\"https:\/\/www.tickertape.in\/blog\/bond-fund\/\">bond funds<\/a> is to allocate your investment proportionately in the long term, short term and, intermediate bond funds.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"International-index-funds\"><\/span><strong>International <\/strong><strong>index funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>If you want access to foreign high-growth companies, then this is the fund for you. Here you get the opportunity to invest in companies outside India. This fund is feasible if you want to avail the first-mover advantage in emerging international markets.<\/p>\n\n\n\n<p>Warren Buffett, the world\u2019s richest investor, said that index funds are one of the ideal investments to grow your capital. The index funds in India have not only been cost-efficient but have also outperformed most of the actively managed mutual funds in the last few years. But like every successful investment, you need to have a good prior strategy for your investment portfolio and a thorough research base. In short, you need to be disciplined.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>If you are looking for low-cost investment options having exposure to stock market instruments and offering stable returns, index funds can be a favourable option<\/p>\n","protected":false},"author":46,"featured_media":2997,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[8],"tags":[342,341],"acf":[],"modified_by":"Aradhana Gotur","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/06\/Index-funds-types.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/2994"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/46"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=2994"}],"version-history":[{"count":3,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/2994\/revisions"}],"predecessor-version":[{"id":4332,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/2994\/revisions\/4332"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/2997"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=2994"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=2994"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=2994"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}