What is index fund, know how to invest and what precautions to take

A popular category of mutual funds is index funds and index funds are a very attractive category for investors who want to take advantage of high returns like stocks without taking much risk. Index funds can solve the problem of such investors. Index funds are considered to be a risk-free and low-cost investment. Here the investor can easily invest in stocks at low cost.

Index mutual funds or index funds are a category of mutual funds. This is called passive fund. These funds invest in the same securities as the index they track. And thus they are passively managed funds. Index weighting is the average composite score that tracks the performance of the stock market. Its calculation is done through the prices of selected shares, which are representative of the market in some way. The BSE Sensex and NSE Nifty are examples of this.

Index funds with moderate risk

Unlike active or actively managed funds, index funds are moderate risk investments. Actively managed funds follow a strategy that outperforms the market, which allows them to take higher risks. With this, your portfolio also includes high risk investments. In contrast, the returns of an index fund are linked to the underlying index that is being tracked.

low cost fund

Another feature of an index fund is that it has a lower expense ratio. That is, the investment cost is low. Index funds are not traded on the exchange, hence, the liquidity of index funds is less as compared to regular funds. However, they are open-ended schemes, which means that you can always sell your mutual fund units back to the mutual fund and redeem your money at any time.

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