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What is an Index Fund, and Types of Index Funds

The index funds hold stocks in the exact proportion as that of the benchmark. E.g., if the weightage of Infosys in Nifty is 10%, a typical index fund that mirrors Nifty will also invest 10% of its assets in Infosys stock.<br>Visit Here :https://navi.com/blog/best-sip-plans/

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What is an Index Fund, and Types of Index Funds

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  1. What is an Index Fund, and Types of  Index Funds

  2. Overview • Mutual Funds are one of the most popular investment avenues. There is a fund type to suit almost every investor profile. You can start your investments with as little as Rs.500 every month. • An index fund is a specific type of mutual fund that is designed to replicate the performance of a chosen benchmark index, such as the BSE Sensex or the NSE Nifty. The index fund has the same portfolio as that of the benchmark and delivers similar performance. • The index funds hold stocks in the exact proportion as that of the benchmark. E.g., if the weightage of Infosys in Nifty is 10%, a typical index fund that mirrors Nifty will also invest 10% of its assets in Infosys stock.

  3. Types of Index Funds • Mutual fund investment is greatly simplified by index funds. They can be broadly categorized under the following five types. • Broad Market Index Funds • Market Capitalization Index Funds • Equal Weightage Index Funds • Sector-Based Index Funds • International Index Funds

  4. Broad Market Index Funds Nifty 500 is a broad market index as it comprises the top 500 stocks across industries and market cap segments. A broad market index fund is a fund that tracks & replicates such a comprehensive index. E.g. Motilal Oswal Nifty 500 Index Fund seeks to closely replicate the Nifty 500 Index.

  5. Market Capitalization Index Fund • The BSE Sensex and the Nifty 50 are benchmark indices that give weightage to stocks based on the company’s market capitalization. • A market capitalization index fund is a type of mutual fund that tracks and replicates any such index. • E.g. Navi Nifty 50 Index Fund

  6. Equal Weightage Index Fund • An equal weight index is one that gives an equal weightage to every stock.  • An equal-weight Nifty 50 Index will assign a 2% weightage to all the 50 stocks. By assigning an equal weightage, the fund seeks to avoid both under & over-concentration in specific stocks. • E.g. DSP Equal Nifty 50 Fund

  7. Sector-Based Index Funds • Sector-specific index funds restrict their investments to only one sector, such as IT, banking, pharma, etc. It is preferred by investors who are bullish on a particular sector of the economy and want to bet on that. • E.g. Navi Nifty Bank Index Fund is one of the best mutual funds in the sector index funds category.

  8. International Index Funds • International index funds track the major indices of other countries and offer geographical diversification to investors. People can invest in mutual funds by the method ofSIP investment, which involves investing a small amount every month. • E.g. ICICI Prudential NASDAQ 100 Index Fund tracks the NASDAQ 100 index (USA)

  9. Conclusion • Index funds adopt the passive investment style approach and offer a low-cost & low-risk option to retail investors who want to invest in mutual funds. • Investment in index funds is ideal for investors who want to build long-term wealth without assuming high risk.

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