Index Funds are good for first time investors

 If you are new to investing in equity and risk-averse, then investing in index funds is a good idea as it will provide you an exposure to a broad based portfolio at a low cost.

Index funds are mutual funds with a portfolio made to manage or track the components of a specific market index. Such funds provide broad market and low portfolio exposure with comparative lower operating costs. These funds follow specific rules and standards irrespective of the ongoing status of the market.

For whom it is suitable

Index funds are generally suitable for investors who are risk-averse and expect predictable returns. One of the major advantages of this type of fund is that they do not require extensive tracking. These funds generate returns matching the upside that the particular index sees. Further, these funds are best suited for those investors who have a long term investment horizon. However, if one wishes to earn market-beating returns then one should not choose index funds.

Consider the following

If the idea of investing in index funds suits your risk appetite and investment goals, follow the tips below before making an investment. It is always a good idea to choose a broad based index fund which helps you cover the majority of the actively traded stocks in the market. For instance, you may choose the NIFTY Top 100 index fund. If you are new to investing in equity and risk-averse, then investing in index fund is a good idea to start with as it will provide an exposure to a broad based portfolio at a low cost.

Most of the index funds are also available as exchange traded funds. The advantage of investing in an index fund is that these ETFs are listed on stock exchanges like stocks. This mares it easy for buying and selling of the same. Investors should prefer those index funds that have lower tracking errors. This is basically the different between the performance delivered by an index fund and the index it replicates. Obviously, higher the tracking error, the less efficient is the index fund in consideration.

Other advantages

As the portfolio is based on the particular index, there is less churning of the portfolio. Hence, significant costs are saved on brokerage thus leading to less expense ratio compared to actively managed funds. With index funds, one can buy and sell anytime during the day at the price prevailing at that time. Hence, one can take the advantage of the price not available otherwise. Empirically, none of the index funds has shown negative results on a long term basis. This shows that index funds can limit the losses of the investors.

To conclude, the investment decision in an index fund solely depends upon individual investors risk preference and investment goals.