What is Index Mutual Fund
What is Index Mutual Fund? Well in this article you get my detailed analysis on this topic and I am sure after this you will surely understand Index Mutual Fund.
If you want to invest in the stock market, this article is for you. I will introduce you to index mutual funds, which could be an exciting option to consider.
Friends, whenever I write an article on stock market investing, then there is some question that emerges repeatedly:
- Which stock to buy?
- How much to buy?
- Should we keep buying the same stock again and again?
- What should be the proportion of new stock against the old stock that we have bought?
- Does this make a change?
- If yes, then how many years of the month and how?
All of them are very valid questions.
It is effortless for me to write an article and ask to invest in the stock market, giving a return of 15% annually over a ten-plus-year period.
- But how does it work?
- What should we buy to get a 15% return?
This is what I am trying to answer in today’s question.
Every person has three questions when they start or try to get stock market investing right for themselves.
3 important question
- Number one, which stock to buy?
- Because that’s the starting point should we buy?
- Because we don’t know which company is doing well?
- What are the fundamentals?
- Which metric should we pick or choose before deciding?
These days tech companies that are not making profits are launching their IPOs, but their evaluation is more than the profitable companies, so what exactly is happening?
What is the basis?
That is an answer that is a hard one to get because it needs a lot of research and time, and you and I may not have that time, but that’s a valid question, which stock to buy?
- Second, if we buy this stock, do we have to buy the same stock every time we want it?
- Should we not buy any other stock?
- How should we evaluate that if you want to buy some other stock?
- Should it be in the same sector as some other industry?
- Should it be bigger or smaller?
- What is a large-cap mid-Cap small cap?
- What is their risk profile?
So those are also valid questions, and again they require research and time.
And that third is an important question as you move ahead in your stock investing journey, and if I buy 2-3 stocks, what proportions should I split my money?
Suppose I have the stock of companies A B and C, and I have around 1 lac or 10 k to invest; how should I distribute in A B, and C? How many stocks should I buy of each of them so that my money is split properly which maximizes my returns?
How do I know the answer?
I don’t know the answer; I am not an expert. I am assuming you are also not an expert, and that is why we need a solution that experts drive.
What is the Solution
Now several years back, there was a concept that was emerged, which was called Nifty 50.
Nifty 50 is a beautiful index that shows the rise of the Indian stock market for several years.
And if you buy this index of 50 stock of Nifty, you accept these 50 stocks in the same proportion as they are on Nifty.
For example, Reliance has a proportion of 13%, so if you are splitting your rupees a hundred, you will buyReliance stock worth rupees 13.
Similarly, if TCS is there in a particular proportion, you will buy it in the same proportions.
Now, this proportion keeps changing.
Suppose there is a fluctuation in the price of Reliance stock, then this portion might go from 13 to 11 or 14or 15, then you will have to invest in the same proportion that is all is hard to track but if you can track it.
It will give you the best and the most stable return that you can get from the stock market because you don’t have to rack your brain anymore.
A Company is doing its job, Nifty, as defined by the index of NIFTY 50, so if you keep investing based on the Nifty 50, then things are great.
Let me show you how that works using an Excel sheet.
So I have taken this reference from the website of capital mind, which is a financial advisory.
Please don’t focus on that; it is an excellent article on Nifty 50 returns.
So I have taken this table from it.
This is a Nifty total return by month.
The total return is significant, which means, total return is based on increasing people’s prices. Still, the dividend is also counted in the full returns, which is a return, right?
So you will increase your value by the movement of price, but your value will also increase by the dividend you get.
In the year 2000, in January, total Nifty increased by 4.9 %, then it increased by 7.1 % in February again decreased 7.5 % in March against 7.5% in April 2% in may it increased by 6.7 % in June.
So you can see it’s going up down but at the end of it composite it went down by 13% in a year.
Then it went down to 17% in a year; this is 2000-2001, this is the time when the internet bubble burst.
After that it started going up, 7.9 % 76% 13%, 37.9% so forth.
So let’s assume that you invested rupees 10000 in January 200o; now what you want to see is a value of these 10,000 today, that is December 2021 till when the data is available.
Your rupees 10000 were reduced in the first year and were Rs 8660. You reinvested the same money in the next year, reducing it to Rs 7180.
But if you remain invested in this, in 2021, those rupees 10000 would be rupees 160000 today; this is almost like taking no risk as this is not NIFTY 50. This is just NIFTY total.
That is why I keep saying the figure of 15%.
I keep saying that if you invest for more than ten years in the stock market, you’ll be getting 15%.
This is what I am talking about.
Now naturally every year the number goes up and down 8600 7000 7710 13015 then 15000, then 21, then 30, then 47 and then went down to 23, then gradually it went up so on and so forth.
So fluctuation is there, but it will always be higher than the original number of 10,000 by a considerable margin over ten years.
This is what is the power of investing in the stock market. Not on a particular stock but the entire stock market.
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So now, if you go to Nifty 50.
The above image is of NIFTY 50, and you will see if we look at 12 months then, these are the stock in nifty 50.
The stock of Asian Paints gives 25.4% of growth in one year.
Wipro gives 58.5% growth in one year so on and so forth.
So there are 50 stocks currently in the Nifty 50, which are the who’s who of every industry.
The top leaders of every industry are there.
So you are essentially betting on India.
You are like; I am betting on top players of every industry in India.
So you naturally will have a great way of doing that.
Now how do you get it done?
NSE White Paper
That is the larger question because you can’t keep a watch on the L&T shares, for example, if you go through the white paper of NSE.
The National stock exchange releases this.
It’s a bonafide paper; it’s fascinating if you go through it.
Over the horizon of 10 years, if you see the absolute return delivered by NIFTY 50, then 60 percent of the time, it has provided a greater than 15% return.
24% of the time, it has given 10% to 15%.
16% of the time, it has given 5-10%
It has never given 0 to 5%, and it has never given a negative return.
This means if you had to compare it with the worst-case scenario with the best product out there, which one???
Fixed deposit, then you will see that in 10 years, Nifty 50 has never given us 5%, which is something even the fixed deposit cannot ever match.
Every time it is giving you more than 5%.
60% of the time, it has given more significant than 15%.
Why would you not invest your money here?
Why would anybody not invest the money here?
One year two years wherever you see the only times in 3 years yes it is 8-10% so if your horizon is three years and you have to deploy some money you will need back within three years, then do not invest in something like this.
I have said this many times: stock market investing is the best investment asset for you or a ten-plus-year period, clearly shown here, not for one 2or three years.
You are better off parking your money in something safe could be a fixed deposit could be a liquid mutual fund, but stock markets are best for ten-plus years.
Here it is showing it’s done in 5 plus years.
It has never given a negative return.
Only 6% of the time, it has given zero to 5%, which means if you invest your money for more than five years, then only 6% times you will get returns similar to FD, but otherwise, it always has given more than that.
95% of the time, you will get more significant than the FD return.
So what I was showing is, look at this, this is a composition change in sector exposure of nifty 50 since inception.
This is the crucial part.
If you want to do everything yourself, you will keep track of this.
All the stocks of financial services have a share of 38%, earlier it was 19, so you will have to buy more as you move along.
The share of the automobile was 12% earlier, but now it is only 6%, so you will have to reduce that so on and so forth.
This gets quite complicated; this is why index mutual funds.
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This is why you invest in index mutual funds because a professional company runs them, so there would be a company working on the index mutual fund for you.
And every bit of this will be done by them.
For that, they will charge you will lowest expense ratio.
So whenever you buy a mutual fund, there is an expense ratio attached, which is the percentage you have to give to the mutual fund to run their operation because they also have to bear the overheads.
So if you deploy Rupees hundred, what percentage of that goes towards running the mutual.
Wallpaper goes towards running the mutual funds operation and what percentage is deployed towards your actual investment.
The expense ratio could be anywhere between.2-1%.
Index mutual funds, especially if you take it from NAVI, have the lowest expense ratio in the market. That is an excellent way for you to enter the market at the lowest cost possible because some other professional is doing all the work for you.
And all you need to do is keep investing.
SIP’s are an excellent way of doing that.
You buy units of that mutual funds, and that is what you use to keep investing every single month, without any confusion about which stock to buy, how many units to buy, how much money should be split in what way, so on and so forth.
That is what an index mutual fund gives us power.
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