Why in news?
• Index funds, as the name suggests, are funds that replicate a certain index. So, if there is a Sensex fund, it will have the same 30 stocks that are there in the Sensex.
• Further, the weightage of each stock in the fund would also mirror their respective weightage in the actual index. Globally, there are many index funds that replicate popular benchmarks like S and P 500 and Dow Jones.
• In the Indian arena, most of the leading mutual fund houses offer index funds based on Sensex or Nifty. Index funds are a form of passive funds since the fund manager does not have to actively do any kind of stock picking. The fund sees a churn in its portfolio only if the actual index sees any inclusion or exclusion.
Benefits of investing in index fund:
• Typically, the benchmark index of any exchange would comprise the largest and most liquid companies publicly listed on that bourse.
• The benchmarks are quite diversified in terms of sector representation as well. So, investing in an index fund allows the investor to have a well-diversified portfolio of the largest companies.
• An investor can own a basket of stocks at a much lower cost compared to owning each stock individually in a benchmark.
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