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Index Funds for Beginners – Index Funds क्या हैं, कैसे Invest करें? - YouTube
Channel: Asset Yogi
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Friends, Warren Buffet says
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that index funds are mostly the best investment for long term investors.
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Why does he say that? This is what we are going to learn in this video
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So in this video, we will understand
what are Index Funds?
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How do they work?
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Along with that, we will also see
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what is the difference between Index Funds and Mutual Funds?
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How much do index funds charge?
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What is a tracking error in index funds?
why we should understand it and track it?
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Finally, how to invest in Index Funds?
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We'll see a demo of it.
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What are the things we should keep in mind?
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We are going to learn everything.
The video will be interesting so stay tuned!
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To watch the latest finance videos subscribe to the channel
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while pressing the bell icon, do click on "all"
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so that you will get a notification of the latest video.
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Friends, if you want to learn more about investment and the stock market
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then you can follow our playlist
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For the stock market, there's master investor series, there's mutual finds series,
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series for real-estate, there is a series for bonds
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You'll get all these links in the description below.
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Many other investment-related important links will be in the description below.
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Let's first understand what are index funds?
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the first word of the index funds is the index
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let's understand it first
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I am sure many of you will be knowing this but still let's summarize it quickly.
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Sensex is an index in itself
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where 30 companies are being tracked.
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This means, the top 30 companies in India,
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we get to know their price-movement from Sensex.
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So, when we say Sensex crossed 50,000
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that means the value of the index of all those companies got raised to 50,000
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Similarly, in nifty 50, the index of the top 50 companies are being tracked.
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so in this way, there can be different types of index
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like Bank Nifty is one index
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Nifty Next 50, is to track the companies which come after the top 50 companies
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There can be S&P 100, which means an index for top 100 companies
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Similarly, there can be sectoral indices
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which tracks a particular sector
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So this is all about index
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Now, if a fund invests in such kind of index
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we call them index funds.
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So basically, an index fund is a kind of mutual fund only.
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In mutual funds, we can invest in stocks in different ways
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any fund manager can invest as per his will
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But in index funds, it is a clear mandate.
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That means if any index fund is saying we will invest in nifty 50
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means they can't deviate from it. They'll invest in top nifty50 companies only.
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So basically, how do these index fubds work?
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As money is collected in mutual funds, similarly in index funds also
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money is collecetd from investors.
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So, how these funds will be invested?
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as we've already talked, whatever index the funds is following,
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let's assume it's following nifty 50
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So all the stocks of nifty50 are there,
as much as the weightes they have
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index will but that many funds.
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If we take an example here, let's assume a index, i am taking a hypothetical example
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that index has only 4 stocks
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one stock represents almost its 40% weightage
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so, let's call it stock A
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let's assume stock B has 30% weightage
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and let's assume stock C has 30% weightage
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and stock D, the fourth stock has a 10% weightage.
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If a fund manager wants to invest, then he'll invest according to these weightages
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in stocks A, B , C and D
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So, in a similar way, he can invest in nifty50
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can invest into bank nifty if it's a bank nifty index fund
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he can invest into nifty next 50 if it's a nifty50 index fund or bank nifty index fund
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This is all about the index funds.
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Now, let's see how their comparison can be done with mutual funds?
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First, lest talk about how investments are done in it.
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When we invest in mutual funds, first all the money is pooled
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then the fund manager decides when he has to sell or buy any fund
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so the rebalancing keep happening like that.
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It means it's an active form of investing.
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The fund manager is doing research.
He is buying and selling.
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So here, a lot of activity is involved.
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But in index funds, it becomes a passive form of investing.
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Because here the fund manager doesn't have to do any brainwork.
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He just has to blindly follow the index.
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And if we compare them in portfolio rebalancing, then
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in mutual funds, portfolio rebalancing keep happening
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it depends on the company's performance
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or in sector's performance
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How is the economy doing?
In which direction economy is going?
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In that also fund manager can take his call
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when and what stock to buy, when to take the exit.
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or make cash possibilities a little more.
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But in index funds, compulsorily,
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whatever are the index's constituents, you have to follow them only.
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So, if any index gets updated quarterly,
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if there are any changes, then at that time only portfolio rebalancing will be done.
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So, in index funds, rebalancing is done quarterly that too only if needed.
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The third and biggest difference between index funds and mutual funds
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that is of expense ratio, that means,
what are the charges?
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In mutual funds, there are lots of activities involved, it is an active form of investing
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Fund house has to do the research
Fund manager has to put his efforts
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a team is being maintained.
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There are Marketing expenses,
admin expenses,
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that's why 1-2% and sometimes your expense ratio also goes up to 3%
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But in index funds,all these activities aren't involved,it's a passive form of investing
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here the effort is less and so the charges are from 0.1% to 0.3%
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So, these were the broad differences between index funds and mutual funds.
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Now, the question arises why should we invest in mutual funds?
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The first reason, which you may have understood by now, is low charges
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there are very low charges,
the cost almost becomes 1/10th
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and this 1-1.5% which you save here can be a big amount in the long term
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Second, data says that generally this passive form of investing
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this beats the majority of the investment expert professionals.
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So, that means, the majority of the mutual funds failed to beat the index funds
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or in whichever type of sector, they are investing
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data suggests that many expert professionals could not beat.
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That's why Warren Buffet says, who are no known- nothing investors,
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who can't devote much of their time, for them this is the best form of investing.
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But let me give one disclaimer here
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I am not saying at all that you shouldn't invest in mutual funds.
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If a mutual fund is beating any index and giving significantly higher returns, then
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definitely, you can go with that mutual fund.
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You should do research that what were the returns in the past for that mutual fund.
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Along with that you also have to keep in mind when mutual fund return's are shown,
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dividends are added to them.
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But when we talk about any particular index,
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the dividends are not reflected in that index.
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So, we've to make sure that we do an apple to apple comparison
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whenever we are comparing a mutual fund to the index fund.
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Now, when we invest in index funds, one more thing becomes very important
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which we should understand.
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And that is a Tracking error.
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Now, what is this tracking error?
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Generally, people get confused between two things
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one is tracking difference and one is tracking error.
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Let's understand the tracking difference first.
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Let's assume If there's an index fund of nifty 50 and
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and let's say on average It has given a return of 15% in a year
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But the index fund, which was tracking nifty 50 has only given returns of 14.5%
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that means the difference comes about to be 0.5%.
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We will call it tracking difference.
It is 0.5%.
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But tracking error and tracking difference is different.
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Here, the tracking error is comparing volatility.
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That if nifty 50 is giving returns of 15%
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and if this difference is being maintained at 0.5% only
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That means there's no volatility.
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the index funds keep consistently maintaining that amount of difference.
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But this difference, it is starts fluctuating, then?
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that means volatility comes in this difference
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which we call, in technical language, Standard deviation.
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So, if we calculate this standard deviation of last 4-5 years, which means
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sometimes it's making a tracking difference of 0.5%, sometimes of 1%
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sometimes it's making a difference of 2%
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It means there's no consistency in their returns.
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This is what we wall Standard Deviation or volatility.
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These returns are very fluctuating.
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So whenever we invest in a mutual fund,
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our target should be that this tracking error is very low
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that means this standard deviation or the volatility,
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the ups and downs are as low as possible
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they follow that index as much as possible
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And see tracking error of any fund can't be zero
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and there are many reasons for the same.
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The first is that when you're following some index
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there aren't any charges for that
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but whenever we are investing in index funds, some expenses have to be paid.
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They can be a bit variable.
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It means in one year they can be 0.5%, in other they can be 0.15%
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Second, mutual funds or any index funds maintain their cash possession.
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This cash possession can be different for every year.
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It can be 2% in some year, 5% in other or maybe 8% in some year.
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Third, whenever you want to buy or sell any stock
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If you want to replicate any index, then have to buy and sell stocks as well
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Sometimes volatility is very high in a stock.
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That on whatever price you are buying the particular index fund,
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it might not be the same.
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This also could be the reason.
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Secondly, many times there's a problem with liquidity.
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When you want to buy right away, you may not get the goods.
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So these are some reasons due to which tracking error arises.
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But the point is this tracking error should be as low as possible.
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So do check the tracking error when you are investing in a mutual fund.
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Let's come to our last point that how to invest in index funds?
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So, in this, you definitely have to keep 2 things in mind.
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The first point is that you have to check the charges first.
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Wherever there are low charges, it could be possible that returns are better
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because there our cost has gown down so much.
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Second, we have to see this tracking error.
Tracking errors should be minimum.
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Third, many people think that De-mat accounts would be needed
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to invest in index funds.
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No, we do not need De-mat accounts.
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You can directly invest through mutual funds' apps.
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Use such apps where you can directly invest in mutual funds.
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Because index funds are also a kind of mutual funds only.
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Here, there's no commission charge.
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You can invest by coin money, through Zerodha, Groww, Paytm money, Kuvera
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This is the one way to invest in index funds.
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But I will still suggest you to open a
De-mat account because
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there's one product called ETF and you invest in it
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and in ETF we get better options than index funds
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and these ETFs trade in market
like stock trades
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If you want me to do a detailed video on ETF then comment down below.
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and I'll give you the link with the latest offers for opening a De-mat account.
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Let's quickly see a demo on how to invest. Here, I am going to use coin by Zerodha
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I am using Zerodha's coin app which you can download from play store or AppStore
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To use this you should have an account in Zerodha.
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Account opening link will be in the description if you want to use Zerodha
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Here, you've to search for index funds.
I've typed index funds here.
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You'll get all the index funds from all the assets management companies of India.
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you can check here.
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Let's suppose you want to invest in ICICI prudential nifty next 50 index funds
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by clicking here you will get all the details
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If you buy then you can invest in lumpsum also
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and you are getting an option of SIP along with that
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That means a systematical investment plan. You can invent monthly or quarterly.
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So this was our one more video in the mutual fund series
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where we learn about mutual funds in a bit more detail.
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If you want me to do a detailed video on ETS i.e exchange credit funds
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then tell me in comment down below.
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If you liked this video then do like it and share it with your friends and family.
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I am sure they would also love to know about index funds.
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And they'll also get to learn something new from this video.
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If you have any suggestions
related to this video and channel
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then you can comment down below
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If you haven't subscribed it yet then do subscribe
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and press the bell icon on your phone so that you get the latest video notification
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So see you in the next informative video.
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Till then keep learning, keep earning, and be happy as always.
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