{"id":4799,"date":"2021-09-28T17:46:42","date_gmt":"2021-09-28T12:16:42","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=4799"},"modified":"2022-05-24T18:39:48","modified_gmt":"2022-05-24T13:09:48","slug":"4-factors-to-consider-before-investing-in-index-funds","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/4-factors-to-consider-before-investing-in-index-funds\/","title":{"rendered":"4 Factors To Consider Before Investing in Index Funds"},"content":{"rendered":"\n<p>There comes a phase in life when you start earning well, and instead of spending all of it, you think of investing a decent portion of your earnings in stocks, <a href=\"https:\/\/blog.tickertape.in\/types-of-mutual-funds-a-quick-overview\/?utm_source=blog&amp;utm_medium=article\" rel=\"nofollow noopener\" target=\"_blank\">mutual funds<\/a>, <a href=\"https:\/\/www.tickertape.in\/blog\/the-golden-behaviour-during-crisis\/\">gold<\/a>, and <a href=\"https:\/\/www.tickertape.in\/blog\/stock-market-index\/\">index<\/a> funds.&nbsp;<\/p>\n\n\n\n<p>The question is, where to <a href=\"https:\/\/www.tickertape.in\/blog\/why-should-you-prioritise-investing\/\">invest<\/a>? Is it in <a href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/\">mutual funds<\/a> or stocks, gold or <a href=\"https:\/\/www.tickertape.in\/blog\/index-funds\/\">index funds<\/a>? There are plenty of choices. But if you are looking for investing in index funds, here is a guide on why these can be a viable option. After all, it\u2019s your hard-earned money, and you have to find the right investment vehicle.<\/p>\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\/4-factors-to-consider-before-investing-in-index-funds\/#What-is-an-Index-Fund\" title=\"What is an Index Fund?\">What is an Index Fund?<\/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\/4-factors-to-consider-before-investing-in-index-funds\/#4-Factors-to-look-out-for-before-investing\" title=\"4 Factors to look out for before investing&nbsp;\">4 Factors to look out for before investing&nbsp;<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/4-factors-to-consider-before-investing-in-index-funds\/#1-Risk-involved\" title=\"1. Risk involved\">1. Risk involved<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/4-factors-to-consider-before-investing-in-index-funds\/#2-Are-they-expensive\" title=\"2. Are they expensive?\">2. Are they expensive?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/4-factors-to-consider-before-investing-in-index-funds\/#3-Are-index-fund-returns-taxable\" title=\"3. Are index fund returns taxable?\">3. Are index fund returns taxable?<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/4-factors-to-consider-before-investing-in-index-funds\/#a-Capital-gain-taxes\" title=\"a. Capital gain taxes\">a. Capital gain taxes<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/4-factors-to-consider-before-investing-in-index-funds\/#b-DDT-Dividend-distribution-tax\" title=\"b. DDT (Dividend distribution tax)\">b. DDT (Dividend distribution tax)<\/a><\/li><\/ul><\/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\/4-factors-to-consider-before-investing-in-index-funds\/#4-Low-flexibility\" title=\"4. Low flexibility\">4. Low flexibility<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"What\"><span class=\"ez-toc-section\" id=\"What-is-an-Index-Fund\"><\/span><strong>What is an Index Fund?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Simply put, an index or index mutual fund is a tool that measures changes of indices of stock markets like <a href=\"https:\/\/www.tickertape.in\/blog\/sensex-companies\/\">Sensex<\/a> of <a href=\"https:\/\/www.tickertape.in\/stocks\/bse-BSEL?utm_source=blog&amp;utm_medium=article\" target=\"_blank\" rel=\"noreferrer noopener\">BSE<\/a> and Nifty of <a href=\"https:\/\/www.tickertape.in\/blog\/national-stock-exchange\/\">NSE<\/a>.<\/p>\n\n\n\n<p>Let\u2019s say you have invested in the NSE Nifty index, also called Nifty50. This index mutual fund tracks <a href=\"https:\/\/www.tickertape.in\/indices\/nifty-index-.NSEI?utm_source=blog&amp;utm_medium=article\" target=\"_blank\" rel=\"noreferrer noopener\">Nifty50<\/a> and distributes your money among the top 50 companies listed in the index.&nbsp;<\/p>\n\n\n\n<p>Each listed company holds a weight ratio. For instance, in 2021, HDFC Bank Ltd has a weight ratio of 10.38% and Reliance Industries Ltd has a weight ratio of 10.33%, while Infosys Ltd has a weight ratio of 8.09%. This keeps changing over time.&nbsp;<\/p>\n\n\n\n<p>Let&#8217;s say you invested Rs. 1,000 in Nifty; then the <a href=\"https:\/\/www.tickertape.in\/blog\/index-funds-2\/\">index fund<\/a> will invest:<\/p>\n\n\n\n<ul><li>10.38%, that is Rs 103.8 in <a href=\"https:\/\/www.tickertape.in\/stocks\/hdfc-bank-HDBK?utm_source=blog&amp;utm_medium=article\" target=\"_blank\" rel=\"noreferrer noopener\">HDFC Bank Ltd<\/a><\/li><li>10.33%, that is Rs 103.3 in <a href=\"https:\/\/www.tickertape.in\/stocks\/reliance-industries-RELI?checklist=basic&amp;utm_source=blog&amp;utm_medium=article\" target=\"_blank\" rel=\"noreferrer noopener\">Reliance Industries Ltd<\/a><\/li><li>8.09 %, that is Rs 80.9 in <a href=\"https:\/\/www.tickertape.in\/stocks\/infosys-INFY?checklist=basic&amp;utm_source=blog&amp;utm_medium=article\" target=\"_blank\" rel=\"noreferrer noopener\">Infosys Ltd<\/a><\/li><\/ul>\n\n\n\n<p>This process holds good for the remaining 47 companies as well.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"2846\" height=\"7645\" src=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/09\/index-funds-infographic-01.png\" alt=\"\" class=\"wp-image-4855\" srcset=\"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/09\/index-funds-infographic-01.png 2846w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/09\/index-funds-infographic-01-112x300.png 112w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/09\/index-funds-infographic-01-381x1024.png 381w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/09\/index-funds-infographic-01-572x1536.png 572w, https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/09\/index-funds-infographic-01-762x2048.png 762w\" sizes=\"(max-width: 2846px) 100vw, 2846px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"Factors\"><span class=\"ez-toc-section\" id=\"4-Factors-to-look-out-for-before-investing\"><\/span><strong>4 Factors to look out for before investing&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Investing in index funds is a much better option if you are looking for a long-term investment. Even Warren Buffet once said that it is heaven for risk-averse investors and for those who want to invest a part of their income at a young age because it will give a handsome return in the long run. Now, without any delay, let\u2019s discuss the factors you should look out for before investing in index mutual funds.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"1-Risk-involved\"><\/span><strong>1.<\/strong> <strong>Risk involved<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The risk involved in index mutual funds is slightly less because of their passive nature, and these are less volatile compared to actively managed funds. But one thing that you should keep an eye on is its tracking error. The lesser the tracking error, the lesser are the chances of risks involved and vice versa. You must invest some portion in active funds like equities because if the market performs poorly, then it will affect index funds as well.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"2-Are-they-expensive\"><\/span><strong>2.<\/strong> <strong>Are they expensive?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>This might be the highlight for some investors as index funds don&#8217;t need to be managed actively. So, no fund manager is required to handle these funds or formulate any strategy. Hence, these funds are inexpensive, and there are funds that have higher returns at a low expense.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"3-Are-index-fund-returns-taxable\"><\/span><strong>3.<\/strong> <strong>Are index fund returns taxable?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>There are 2 types of taxes that are applied on index mutual funds: <a href=\"https:\/\/www.tickertape.in\/blog\/short-term-capital-gain-tax\/?utm_source=blog&amp;utm_medium=article\">Capital Gain Taxes (CGT)<\/a> and <a href=\"https:\/\/www.tickertape.in\/blog\/cash-dividend-vs-stock-dividend\/\">Dividend<\/a> Distribution Taxes (DDT). Let\u2019s take a look at both of these.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"a-Capital-gain-taxes\"><\/span>a. Capital gain taxes<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>If the holding period of index funds is up to one year, then <a href=\"https:\/\/www.tickertape.in\/blog\/capital-gain-tax-on-shares\/\">Short Term Capital Gain Tax<\/a> (STCG) applicable is 15%. And if the holding period of index funds is more than one year, then Long Term Capital Gain Tax (LTCG) is applicable, but there are 2 scenarios:<\/p>\n\n\n\n<ul><li>If LTCG is up to Rs. 1,00,000, then no tax is applicable<\/li><li>If LTCG is more than Rs. 1,00,000, then a flat 10% is taxable<\/li><\/ul>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"b-DDT-Dividend-distribution-tax\"><\/span>b. DDT (Dividend distribution tax)<span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>If you fall under the category of individuals whose annual taxable income is more than Rs. 5,00,000, then 30% will be deducted from the index funds <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-dividend\/\">dividend<\/a>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"4-Low-flexibility\"><\/span><strong>4.<\/strong> <strong>Low flexibility<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>As mentioned before, index funds imitate the indices and manage passively; hence fund managers can\u2019t sell or purchase securities at their own will as per the market conditions. For example, if one of the listed companies performs poorly and the other is performing well, then it\u2019s not possible to retract the fund from a poorly performing company.<\/p>\n\n\n\n<p>Considering the Indian mindset, we can say it is beneficial to invest in index funds for the long term only because it imitates the <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/\">equity<\/a> market and gives minimal benefit in the short term.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Investing in index funds is a much better option if you are looking for a long-term investment. Read 4 factors to consider before investing<\/p>\n","protected":false},"author":27,"featured_media":4846,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[8,1750],"tags":[],"acf":[],"modified_by":"Aradhana Gotur","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/09\/Index-fund-1.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4799"}],"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\/27"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=4799"}],"version-history":[{"count":11,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4799\/revisions"}],"predecessor-version":[{"id":8705,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4799\/revisions\/8705"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/4846"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=4799"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=4799"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=4799"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}