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What is Index fund? Should you invest in an Index mutual fund? - YouTube
Channel: Groww
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A few days ago
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in one day
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the market went up by 5%
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But my portfolio only grew
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by 2 or 3%.
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Then the market went down by 1%.
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And my portfolio went down by 3-4%.
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Why does it always happen
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when we try to make more money
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and build a good portfolio,
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but can't beat the market.
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What do we do in this case?
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How can we stay in the market
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and make good money
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without taking a lot of risks?
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Hello friends,
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I, Jagdeep Singh, welcome you to Groww channel.
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Today
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we are going to talk about Index
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I am going to tell you
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something interesting related to Index
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in which if you invest,
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the more the market changes
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you get more profits.
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Friends, what is Index?
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How do we decide which shares go into Index?
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Because you must have heard of
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NIFTY 50 and Sensex 30.
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I will tell you the basics about the index.
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Imagine that you went to a shop
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to buy chocolates.
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And you were confused about which chocolate to buy
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there is risk in buying a full box of chocolates
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and if you don't like it that it will go waste.
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In that case, the solution is
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that we buy a box
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filled with several types of chocolates.
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What is the benefit of that?
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We get more variety
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and there is less risk
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of it going waste.
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The index is such that
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in an index, we put small shares from several sectors
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and make a portfolio
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which is called the market index.
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To talk about NIFTY 50,
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NIFTY 50 has 50 shares
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taken from different sectors
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These shares could be called
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the best of those sectors.
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In the case of Sensex,
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it has 30 shares from a variety of sectors
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You must be thinking that Index is
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a very good place to invest in.
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I will come back to my first question
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when I told you that when the market
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goes up, the portfolio doesn't always go up.
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The index is a solution
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which will give at least as much
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returns as the rise in the market.
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That instrument is called ETF
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Exchange Traded Fund.
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Now you must be wondering
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how to invest in ETFs.
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And how is it good for me?
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When should I invest in ETFs?
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Who is ETF best for?
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ETF is best for those
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who don't know which stocks
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they should invest in.
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But they think that the market is growing
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so they have to invest
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But they cannot take the risk of
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investing in a random stock.
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It is better for them to invest in ETFs.
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Because, friends,
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ETFs track the index.
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If the index goes up by 1%,
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ETF also goes up by 1%.
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In the longer run,
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you get as much returns
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as you the index has grown.
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You must be thinking how
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we can invest in ETFs.
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Investing in ETFs is very easy.
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If you have a Demat account,
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if you are registered with a broker
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Look for ETFs there
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and you will find multiple ETFs.
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Some ETFs follow NIFTY
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whereas some track Sensex.
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Which one of these you feel
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more confident about
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you can buy ETF related to that one.
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You can buy these anytime,
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and after buying
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its settlement is similar to that of shares
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And it comes to your Demat account.
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Now you must be thinking
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if ETFs are so good,
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then why doesn't everyone invest in it?
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Everything has some risk associated with it.
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Some pros and some cons.
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I will tell you what the problem with ETFs is.
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ETFs have one major problem: liquidity.
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To explain liquidity in simple terms
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if you are buying shares
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you also need a seller
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who is ready to sell the shares.
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Whenever we go to the exchange to
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buy shares of a company
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then you get sellers.
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If the buyers and sellers are readily available
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then the liquidity of that share is good.
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In the case of ETFs,
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liquidity is a problem.
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There is a chance that
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you won't find any sellers when you go to buy.
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For example, when the market went up
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5%, there must have been a liquidity crunch.
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Maybe more people wanted to buy
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and there weren't enough sellers.
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If it wasn't for the issue of liquidity,
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ETF is a good instrument.
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If you think that the market is going up
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you can buy ETFs without second thought.
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You must be thinking
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if there is a liquidity crunch
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who could solve it?
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If I cannot sell
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what I have bought, I will have a big issue
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Friends,
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this problem too has a solution.
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It is called Index Mutual Funds.
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Index mutual funds are like normal mutual funds.
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They pool money from people
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invest in instruments that track
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the index.
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You get as much returns from this
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as you get from index.
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But this mutual fund has an expense
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which isn't too much.
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But the advantage is that
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if you are in need of money,
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you can easily redeem.
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You must be wondering how
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index funds solve the problem of liquidity.
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Because Index funds receive money from a lot of sources.
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They do not invest all the money
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and retain some in cash.
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So that if there is a problem of liquidity
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they can use the cash to solve the problem.
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You must be thinking
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that there are so many types of index funds.
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Many mutual fund companies offer index funds
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Which among them is good?
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I will tell you two techniques to know that.
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First, the expense ratio.
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Expense ratio is the charge
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the AMC levies for managing the fund
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The lower it is,
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the better it is for the investors.
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Because in this case,
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the investment is done directly on the index.
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there is less effort,
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then the expense ratio too must be less.
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So whenever you compare
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index mutual funds
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first of all, compare the expense ratio
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Only then you think about investing.
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As I told you
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index mutual funds keep some portion in cash
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to fulfil your liquidity requirements
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But before investing
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make sure that
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there isn't too much portion in cash.
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The more there is in cash,
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the less the returns will be.
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If there is less returns,
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investors also get less returns.
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If you keep watch of these two factors
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then you can choose a good index mutual fund.
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To talk about data regarding ETFs
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and how it is becoming popular
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in 2008, the market for ETFs was 800 billion.
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It has now increased to 5 trillion.
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What is the reason behind this?
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The market is becoming more mature
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there is less alpha
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To talk about alpha,
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how well people are able to time the market
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how much more benefits they can earn.
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People think that rather than
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losing your money chasing returns
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that they invest in ETFs.
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So that if the market goes up
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you get returns,
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And there is less loss than usual
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After this video,
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I will leave you with a question
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What do you think is better?
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ETFs or Index Mutual Funds?
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Comment to let us know
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what you think.
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Friends, if you enjoyed this video,
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please like it.
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Comment below
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and subscribe to our channel
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because we will make more videos on financial knowledge,
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Happy investing!
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