A few days ago in one day the market went up 5% But my portfolio only grew 2 or 3% in index fund. Then the market was down 1%. And my portfolio went down 3-4%. Why does it always happen when we try to make more money and build a good portfolio, but we can’t beat the market? What do we do in this case? How can we stay in the market and make a lot of money without taking a lot of risks? Hello friends, I, Syed nawaz, welcome you to the SyedLearns. Today we are going to talk about Index funds in stock market.
I am going to tell you something interesting related to Index in which if you invest, the more the market changes, the more profit you get. Friends, what is Index? How do we decide which stocks go to Index? Because you must have heard of the NIFTY 50 and Sensex 30.
I’ll tell you the basics about the index. Imagine that you go to a store to buy chocolates. And you were confused about which chocolate to buy, there is a risk of buying a box full of chocolates and if you don’t like it, it will go to waste. In that case, the solution is to buy a box full of various types of chocolates. What is the benefit of that? We get more variety and there is less risk of it being wasted.
The index is such that in an index such as Nifty 50 or bank nifty, we put small amount of shares from several sectors and make a portfolio which is called the market index. To talk about NIFTY 50, NIFTY 50 has index fund 50 shares taken from different sectors These shares could be called the best of those sectors. In the case of Sensex or nifty, it has 30 shares and 50 shares respectively from a variety of sectors You must be thinking that Index is a very good place to invest in index.
I Have come back to my first question when I told you that when the market goes up, the portfolio doesn’t always go up or goes side ways. The index is a solution which will give at least as much returns as the rise in the market index goes up.
Exchange Traded Index Fund (ETF)
That instrument is called an ETF Exchange Traded Fund. Now you must be wondering how to invest into ETFs in the stock market. And how does it do me good? When should you invest in ETFs? Who is ETF best for? ETF is best for those who don’t know what stocks they should be investing in. But they believe the market is growing, so they have to invest. But they can’t risk investing in stocks at random.
It is better for them to invest in ETFs to get safe returns. Because folks, ETFs track the index. If the index rises 1%, the ETF also rises 1%. In the long run, you get as many returns as the index has grown. You must be thinking about how we can invest in ETFs or exchange market. Investing in ETFs is very simple.
If you have a Demat account, if you are registered with a broker, search for ETFs there and you will find several ETFs. Some ETFs follow NIFTY, while others follow Sensex. In which of these methods or ways you feel most secure, you can buy an ETF related to that one. You can buy these at any time, and after the purchase their settlement is similar to that of the shares and reaches your Demat account.
Now you must be thinking if ETFs are that good then why isn’t everyone investing in them? Everything has some associated risk. Some pros and some cons. I’ll tell you what the problem is with ETFs. ETFs have a major problem: liquidity.
To explain liquidity in simple terms, if you are buying stocks, you also need a salesperson who is ready to sell the stocks. Whenever we go to the stock market to buy shares in a company, there are sellers. If buyers and sellers are available, the liquidity of that stock is good.
Liquidity - Index funds
In the case of ETFs, liquidity is an issue. There is a possibility that you will not find any sellers when you go shopping. For example, when the market rose 5%, there must have been a liquidity crisis. Maybe more people wanted to buy and there weren’t enough sellers because less amount of shares.
If it weren’t for the issue of liquidity, ETF is a good instrument. If you think the market is going up, you can buy ETFs without a second thought. You must be thinking if there is a liquidity crisis, who could fix it? If I cannot sell what I have bought, I will have a big problem Friends, this problem also has a solution. It’s called Index Mutual Funds.
Index mutual funds is just like normal mutual funds in equity. They collect money from people who invest in instruments that track the index. You get as many returns from this as you get from index. But this mutual fund has an expense that is not too much. But the advantage is that if you need money, you can easily redeem it. You must be wondering how index funds solve the liquidity problem. Because index funds receive money from many sources. They don’t invest all the money and keep some cash. So if there is a liquidity problem they can use the cash to fix the problem.
Index Mutual funds
You must be thinking that there are many types of index funds. Many mutual fund companies offer index funds. Which of them is good? I will tell you two techniques to know how u can select index fund. First, the expense ratio. The expense ratio is the charge the AMC charges for managing the fund. The lower it is, the better it is for investors. Because in this case, the investment is made directly on the index. there is less effort, then the expense ratio should also be less.
So whenever we compare index mutual funds first of all, compare the expense ratio Only then you think about investing in that stock. As I have told you index mutual funds keep some portion in cash to fulfill your liquidity requirements of the customers and expenses But before investing make sure that there isn’t too much portion in cash. The more there is in cash in the system, the less the returns will be. If there is less returns, investors also get less returns for thier investment. If you have keep watch of these two factors then you can choose a good index mutual fund in stock market.
To talk about data regarding ETFs and how it is becoming popular in 2008, the market for ETFs was 900 billion Rs in 2020. It has now increased to 5 trillion. What is the reason behind this? The market have become more mature there is less alpha To talk about alpha here,people are able to time the market how much more benefits they can earn.
People think rather than losing your money chasing returns that they invest in ETFs for safe return. So that if the market goes up and you get good returns, And there is less loss than usual After this article, I will leave you with a question What do you think is better for you? ETFs or Index Mutual Funds? If you have enjoyed this article comment below, because we will write more articles on financial knowledge, Happy investing!