index funds Archives – Vipin Khandelwal

This article assumes that you understand active vs passive funds. Click here to read the primer.

Index funds as well as ETFs or Exchange traded funds are very popular in US and Europe. So much so that Vanguard, the largest mutual fund company in the world, offers only ETFs.

ETFs follow a passive management style. They simply mimic the index in terms of its holdings and produce a similar return too. The cost of these funds is very less since there are no fund management charges or active trading involved.

Now, seeing the popularity of these funds, it comes as no surprise when the investor, more specifically, the NRI investor comes asking for ETFs and Index funds to invest in.

The reasoning is clear – beating an index consistently over a period of time is a difficult task. The investor is better off investing in an ETF based on an index thus save expenses and improve his returns.

Let’s test this hypothesis as of today.

No one wants to buy index funds

The concept of Index funds has not worked in India, at least not so far. They are super hit in countries like the USA but not in India. Vanguard in the USA, the largest mutual fund company, has all its products as index funds.

Further read: Founder of Vanguard, John Bogle’s 8 Rules to build your mutual fund portfolio

Less than 1% of the overall investments in equity mutual funds in India are in index funds. That says it all.

The one word that would come to anybody’s mind who is picking mutual funds is ‘performance‘, which again, for index funds, is nothing to write home about.

There are several ‘other funds‘ that have delivered much better returns. And is that not what we want – more returns?

The ‘other funds‘ are the ‘actively managed‘ funds compared to the ‘passively managed‘ index funds.

Having said that, there are some key benefits of using index funds as a part of a long-term portfolio. Let’s explore them here.

Is investing in ETFs and index funds better?

The curious case of Index Funds