Index fund will get more benefit in less cost

The ways of investing in mutual funds are changing rapidly in the country. Investor interest in active funds is waning. The cost is high due to the active role of the manager in managing them. On the other hand, in passive schemes, the fund manager does not play an active role, hence their cost is less. Now the difference in returns between both the schemes has been reduced, hence the popularity of passive schemes has started increasing. This is the reason why the AUM of the passive fund increased by 57% in 2021 as compared to 2020. Not only has the interest of investors especially in index funds increased, but mutual fund houses are also giving more attention to them.
The main reason for this is that index funds have a simple portfolio. It consists of the same shares, which are in the index of the stock exchange like Sensex and Nifty. For example, if a mutual fund house has launched a Nifty 50 index fund, then it will have 50 shares of Nifty itself. Ashwin Patni, Head Products & Alter Natives, Axis AMC tells you the advantages of investing in Index Funds.
If one invests in a fund that tracks the BSE 500 Index, the entire investment will be spread across the top 500 companies of the BSE. If you invest in a fund that tracks the Nifty 100 index, you are actually investing in the top-100 stocks of NSE together.
The expense ratio of an index fund ranges from 0.02-0.2%. That is, if you invest 1 lakh in such a fund, then its cost will be only 20-200 rupees. Since the expense ratio of other active funds is 0.5-1.0%, an investment of Rs 1 lakh in these will cost Rs 500-1,000.
In the current times of high volatility, investors want transparency in the portfolio along with returns. Index funds are allowed to include shares of only those companies which are listed in the respective index. In such a situation, investors know in which stocks their money is being invested.
Stocks from all sectors together do not give better returns. The stocks of IT companies that have given excellent returns for two years are declining these days. On the other hand, FMCG and auto stocks are doing well. In such a situation, investors can invest in the sectoral index of choice with good potential.
Thematic investments like cloud computing, electric vehicles and new economies have been trending for a few years now. Fund managers also keep an eye on a theme or themes that are capable of showing stability and rapid growth in the future. Index funds offer an opportunity to take advantage of such thematic innovations in investing.
For 15 years, the alpha of the mutual fund i.e. the return above the benchmark has been declining. In recent years, two-thirds of active funds' returns have been below the benchmark of the top-100 stocks. In such a situation, index funds can be more beneficial. Their cost is less.