The Pros of Index Investing

Index funds are a type of mutual fund or exchange-traded fund (ETF) that aim to replicate the performance of a specific market index, such as the Nifty or Sensex. They are passively managed, meaning they do not try to beat the market, but rather aim to match its performance.

Index funds are considered a low-cost alternative to actively managed mutual funds because they do not require the same level of research and analysis and therefore have lower expense ratios.

Lower Cost

Investing or trading in the stock market involves costs such as brokerages and taxes that must be paid by the investor or trader. Active mutual funds generally have higher costs due to a larger number of transactions. On the other hand, index funds, which are passively managed, have lower costs. It is easy for investors to purchase ETFs through their broker's platform and they only need to pay standard brokerage and taxes on the initial investment. There are no additional yearly expenses required.

Diversification

Concentrating all of your financial resources in one place can be risky because if it turns out to be a poor investment, you may lose everything. Even a well-performing index stock may become a bad investment in the future and may eventually fall out of the index. It is crucial to have a diversified portfolio to reduce potential risks.

Just as a basket of various fruits is more nutritious than one filled only with oranges, a portfolio with a mix of the best stocks is more likely to produce long-term returns. Diversification means investing in a variety of stocks and sectors, not just one.

Index funds or ETFs offer a simple solution to this problem. They not only generate returns that match the indices they track, but they also provide the diversification that your portfolio needs. The weightings of the stocks in your portfolio are automatically adjusted by the fund, so a good company will automatically outweigh a weaker one.

In this way, investors do not have to worry about the weightings of their portfolio and can benefit from the diversification and automatic rebalancing offered by index funds or ETFs.

International Investments

Investing solely in one country, especially if it is going through a difficult economic period, can be risky. Diversifying your investments across multiple countries can reduce this risk. Investors can choose between actively managed domestic mutual funds or passive global ETFs for international investments.

Global ETFs allow Indian investors to invest in international indices and are traded on the cash market segment of the National Stock Exchange (NSE) in the same way as other listed companies. The benefit of investing domestically is that you use the Indian currency, eliminating the need to convert to another currency before investing.

Another advantage of global ETFs is that if the value of the rupee depreciates, your international investments made through these funds will generate higher returns in terms of the INR, effectively hedging against a depreciating currency.

There are a few Global ETFs listed on the Stock Exchanges in India.

Investors can consider investing in Motilal Oswal NASDAQ 100 ETF, which gives exposure to the top 100 technology companies in the United States represented in the NASDAQ 100 index. Another option is the Hang Seng Bees, which comprises the top 50 companies on the Hong Kong Stock Exchange and represents 58% of its market capitalization. These ETFs provide the opportunity to invest in leading companies in the respective countries.

I hope you enjoyed reading & learned something new.