What Are Index Funds? And Why Should Everyone Invest In Them? What is NIFTY or SENSEX?

Looking forward to investing your money in the equities through mutual funds confused with all the different varieties of schemes available? Doubting the ability of the experts of the mutual fund schemes? Still don't want to miss out on the opportunities to increase your net worth? Here is why you should invest in INDEX!

In my previous article, I explained what are the different categories of mutual funds and how to choose the best mutual fund for you. I explained which questions you need to ask yourself before starting your journey of investment. If you haven't read it yet, I recommend you to go through that before reading this article. Click on the link below to read it.

Which Mutual Fund Should You Invest In?

Every time I discuss investing with someone, be it, my family members or my friends, there are a few questions that pop out each time. "How can we trust the fund manager to use our money in the right way?", "What if the calculation of the fund manager go wrong?", "How often does the fund manager review the portfolio in which our money is invested?" "How many years should we stay invested?" and similar others. And all of these questions are valid as per the point of view of someone who is looking to start their investment journey.

It is very easy for me to say that invest in a large-cap mutual fund and earn an average of 13-15% returns per year if you stay invested for a duration of 10 years or more. How does it really work? There are 100 companies in India that are categorised as large-cap. Can the fund manager make the right choice on which companies of these 100 large caps provide us with the best returns? If these are questions that are emerging in your mind, you are at the right place as I am going to answer the very exact questions in this article.

Decades ago in 1997, the National Stock Exchange (NSE) in Mumbai which happens to be the leading stock exchange in India, launched a benchmark which is termed as the NIFTY 50. Its purpose is to present the picture of how the top 50 companies registered in the Republic of India is performing.

If you manage to invest in a mutual fund that invests your money in these 50 companies and in the same proportion to which they contribute to the Nifty 50 which means if Reliance Industries constitutes 10% & HDFC Bank constitutes 8% of the Nifty 50, your mutual fund should distribute your money in the same ratio in these companies, then it is going to give you the best and the most stable returns that you can generate from any equities.

How does NIFTY 50 work?

I am attaching an image below that shows you the return of NIFTY 50 companies in the last 20 years month wise.

NIFTY 50 Monthwise Returns Since 2000

The green cells in the above chart indicate positive returns while the reds indicate negative. It implies these companies does not guarantee that they will just keep on making huge returns every month or every year. For instance, if you can check, NIFTY 50 generated returns in -14% & -16% during 2000 and 2001 but they bounced back and generated 71%, 10%, 36%, 39% and 54% from 2003 to 2007 and then again dived down to -51% in 2007. But if you are smart enough to notice that regardless of the yearly ups and downs, if you stay invested for a long term i.e. 10 or 20 years, you are going to make incredible returns. Didn't get how long term investing in the Nifty 50 will make you rich? Let me explain with an example.

Suppose you invested ₹10,000 in the NIFTY 50 in the Jan of 2000. Then your invested amount would have tumbled to ₹8660 by the end of 2000 as the entire stock market was going downhill. It would have further nose dived to ₹7100 by the end of 2001 as the market kept on falling in 2001 as well. But then the market recovered and kept on growing till 2007 by which your invested amount would have been valued at ₹40,000 (approx) i.e. a 300% gain in 8 years. But then again in 2008, it plunged to ₹23,000 but by the end of 2010, it soared to ₹50,000. The up and down continues and if you stood firm with the investment till the end of 2021, can you imagine what would it be valued at?

Your investment would have been valued at ₹1,60,000 by the end of 2021. Yes, you read it right! Your ₹10,000 would have been increased by 1500% in the last 20 odd years. This is why I keep on focusing on the keyword "Long-Term." This is what I keep talking about when I mention that you can make 12-15% returns every year in equities if you can stay invested for the long term. Equities will fall and rise but over a 10 year period, the number will lift off by a considerable margin.

How can you invest in this index?

If you are looking to put your money in the index, here is where the Index Mutual Funds come into the scene. They are basically a type of Equity Mutual Funds that invest in these NIFTY 50 companies. The fund manager does not apply much brain doing many calculations and all. He/She just basically distribute your money among these companies. Every year the National Stock Exchange shuffles the list of NIFTY 50 twice. Non-performing companies are pushed down and the deserving ones move up. Sometimes new companies join the list while the underperforming ones are kicked out. The fund manager of an index fund work in line keeping in check the list released by the NSE.

There is another benefit of investing in an index fund and that is the fact that index funds generally have a much lower expense ratio when compared to other equity mutual funds. The Expense Ratio is the amount that the mutual fund deducts from your investment to manage its own expenses. For more info on the expense ratio, click here. This is the best way to start your investment journey.

There are many more similar indexes as the NIFTY 50 but I don't prefer investing in those. If you are interested, I will make an article on why I prefer NIFTY over others.

I personally use "Groww" to invest in mutual funds, track them and so far I do not have any complaints against them. You can just search "NIFTY 50 funds" in its app or website to start investing in index mutual funds. This is not sponsored. You can use any platform of your choice.

If you are planning to open an account using Groww and invest in mutual funds, you can use my referral link, through it both of us can get ₹100 deposited in our account when you activate your account on Groww. It is a win-win situation.

Click here to open an account on Groww.

And finally, we have made it to the end of the article. I hope this imparted some value in your life. Consider giving a like and share it among your peers. To get notified of new articles, sign up to the NerdyTree.

Let me know if you have any questions on Index Mutual Funds.