What is index fund?

There are two kinds of investing.

Active Investing

This involves active analysis of the company while investing. It involves answering the following questions

1. How is the company performing?
2. At what price should i buy?
3. What %age of my portfolio, should the stock occupy
and more questions.

Passive Investing

This involves creating a portfolio by simply replicating an already existing system witout any change at all.

Index Fund

Index funds are an example of Passive Investing where in the fund's portfolio is created completely by replicating an index.For eg, nifty index fund will constitute stocks present in nifty in the same ratio as it is in nifty

Advantages

1. The index fund has a lower cost attached to it. Since it has minimal transactions in terms of selling and buying stocks, it has a lower expense ratio. Lower expense ratio reflects in the NAV of the fund.

2. The investment objective is simple to understand and easy to track since its a mirror image of an index.

3. There will not be any change in fund's objective since it is based on index.Today lot of funds are churning their portfolio often.

Disadvantages

1. In the downward market, there will not be any cushion against the fall, since it does not have cash in its portfolio and is always fully invested.

2. When the tracking error(diff between fund's return n index return) is more than 2-3%

3. It can not outperform the benchmark index since it exactly replicates the index portfolio.

Target Investors

It is suitable for investors who are contempt with the broader market returns given by various indices.