Index fund
Also called: Passive fund · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
An index fund is a passive fund. It does not try to pick winning shares. It simply copies a market index such as the Nifty 50, holding the same companies in the same proportions. There is no costly research and little trading, so its fees are low. Its return closely follows the index, minus small costs.
Example
A Nifty 50 index fund holds all 50 large companies in the Nifty 50, in their index weights. If the Nifty 50 rises 10% in a year, the fund rises by roughly 10%, less its small expense charge. An investor puts Rs 5,000 a month into it through a SIP (Systematic Investment Plan: a fixed sum invested at regular intervals).
Don't confuse with
- Exchange-Traded Fund (ETF): also tracks an index, but its units trade on a stock exchange like shares, with prices changing through the day. You buy and redeem index fund units from the fund house at the day's NAV (net asset value per unit).
- Actively managed fund: a fund manager picks shares to try to beat the index, at higher cost.
Related concepts
- Mutual fund
- Net Asset Value
- Systematic Investment Plan
- Exchange-Traded Fund
- Gold ETF
- Fund of funds
- Real Estate Investment Trust
- Infrastructure Investment Trust
- Domestic institutional investors
- Participatory notes