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What is Index Fund?

An index fund, as the name implies, invests in stocks that resemble stock market indexes such as the NSE Nifty, BSE Sensex etc.

In this case, the fund manager invests in the same securities as those highlighted in the index, in the same proportions, without changing the portfolio composition.

These index funds are passively managed which means, it tries to manage returns offered by the index.

Index funds are different from actively managed funds. In actively managed fund, the fund manager changes the composition of portfolio according to the assessment of underlying stocks. This adds an element of risk.

Hence, passively managed funds are less volatile than the actively managed funds.

When there’s a market rally, index funds often provide good results. However, it is often recommended to switch on actively managed funds in a market crash.

As index funds are passively managed, they replicate the behavior of that particular index. There is no requirement of any research and analysis hence the expense ratio is very less.

This becomes the unique selling point of an index fund.

These funds are usually for longer tenure about 7 years or more. It is observed that in short term, index funds show fluctuations while in the long run, it averages out.

Before investing, one should be aware of the taxation applied on the funds.

Legendary investor Warren Buffett has frequently touted the benefits of investing in low-cost index funds.

In fact, he's instructed the trustee of his estate to invest in index funds.

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