Index Fund Explained

INDEX FUND: THE WINNER OF A MILLION-DOLLAR BET

Legendary American Investor Warren Buffett believes that when it comes to investing, sometimes doing nothing is all you need to do. In 2007, Warren Buffett bet a group of Hedge Fund Managers $1 million that they won’t outperform the US S&P 500 index over the next 10 years.

The winner?

S&P 500 index delivered a compounded annual growth rate of 7.1%, while the basket of Hedge Funds managed only 2.2%
Buffett Speaks:

Index Funds are a great way to boost savings. They are inexpensive and diversified.

Index Fund Explained:

Index Funds are passive Mutual Funds that track Indices like Nifty 50, Nifty Next 50, etc.

• The Index Fund portfolio will broadly have the same securities and in the same proportion as its underlying Index.
• The scheme attempts to capture market returns, by taking exposure using an index, instead of trying to actively select the Stocks.

Factors critical for choosing the right Index Fund:

• Size i.e.Assets Under Management helps in efficient tracking of the underlying index.
• Cost i.e. Total Expense Ratio measures the total costs associated with managing and operating the Fund. Low cost implies better returns in the hands of investors.
• Tracking errorshows the inefficiency and inconsistency with which an Index Fund is tracking its underlying benchmark.
• Tracking difference shows the return difference between the fund and its total return benchmark index for a particular time period.