Invest in Index Funds for Diversifying your Portfolio

Index Funds
• An Index fund follows a passive investing strategy called indexing.
• It usually holds stock in the same proportion as that in the represented index.
• It doesn't aim to outperform the index but tries to replicate the performance of the benchmarked index.
Advantages of Index Funds

Low Risk
Index funds track a broad index, which is less volatile than specific stocks or sectors, thereby lessening the risk for investors.
Low Costs
Lower transaction costs and fewer expenses make index funds cheaper than the actively managed funds. Generally the expense ratio of index funds ranges from 0.5% to 1.5% compared with up to 2.5% in diversified funds.
Simplicity
The investment objectives of index funds are easy to understand. Once an investor knows the target index of an index fund, what securities the index fund will hold can be determined directly.

No change in investment style
Actively managed funds may drift from the style of investing described by them, which may increase the risk. With index funds this drift is not possible and accurate diversification of a portfolio is maintained.

Indexing is considered as Passive investment strategy, as it involves replicating the investment pattern and returns of a broad market index.

Index Funds-Passive Management style
Passive Management: A fund manager simply invests in the stocks constituted in an index, in the same proportion as they are present in the index. His goal is to ensure that the fund mirrors the performance of the index.
Active Management: A fund manager uses his knowledge and expertise to select a portfolio of stocks in lines with the investment objective of the scheme to get higher returns than the benchmark. He then regularly tracks the portfolio and churns stocks, if necessary.

Key Analysis
• An analysis of 5 year returns of various equity oriented schemes shows that, though the returns from actively managed schemes are higher, their downside risk is also high.
• Index funds on the other hand, though has given comparatively lower returns, their returns have been consistent and less volatile.
• Index funds should form a vital part of investor's portfolio. In India, index funds are generally open ended mutual fund schemes that aim to replicate / track the movement of the target index.
The following indices are generally replicated through index funds:
• BSE Sensex
• S&P CNX Nifty
• S&P CNX 500
ICICI Mutual Fund has Launched Nifty Junior Index Fund
• An open-ended index fund.
• Seeking to achieve the returns of the CNX Nifty Junior.
• CNX lNifty Junior is a higher risk, higher return index compared to S&P CNX Nifty.