Zebu blog

Category: Mutual Funds

  • The Quick Guide To Index Funds

    An index fund, also known as an index-tied or index-tracked fund, is a mutual fund that mimics an index’s portfolio.

    What is an Index Fund


    Investors think of index funds as an instrument to diversify their portfolio – they simply give the same returns that you might get if indices were purchasable. Since popular indices are not susceptible to rapid movements, index funds are a safe bet for risk-averse investors.They simply ensure a performance that is theoretically similar to the index movements.

    Because index funds are not actively managed, they are less expensive. They will not outperform an index but simply replicate its movements. They help investors diversify and balance the risk in their portfolio.

    How Do They Work?


    If you consider an index fund that mirror’s Nifty 50, it will contain the same stocks as the index and with the same weightage. Index funds are called as passive fund management because they simply monitor the movement of an index. Based on the composition of the underlying index, a fund manager divides your funds with the right weightage for certain stocks. Index funds, unlike actively managed funds, do not have their own team of research experts to find opportunities and pick stocks.

    While an actively managed fund aims to outperform its benchmark, an index fund’s goal is to mirror its index’s performance. Index funds usually produce returns that are similar to the benchmark. However, there will be a marginal difference between the returns of both. This is the tracking error and it is the fund manager’s job to reduce this error as much as possible.

    Who Should Put Their Money in Index Funds?


    As with any investment, you need to first understand your risk tolerance and investment objectives. Index funds are for those who do not want high risk but are also realistic about lower returns. If you do not have a lot of time to monitor the stock markets every year, then this one is for you. You can choose a highly liquid Sensex or Nifty index fund if you want to invest in stocks but don’t want to accept the risks associated with actively managed equity funds. While index funds will give you returns that are comparable to an index’s movements, you need to opt for more actively managed funds if you want to outperform the market.

    What to Consider as an Investor


    As with any investment, one of the first things to consider is the platform that you are going to buy these funds on. With Zebu’s lowest brokerage fees, and our credibility as one of India’s best share market brokers, we guarantee that you will have access to the best trading accounts in the country.

    Risk

    Index funds are less susceptible to equity-related volatility and dangers because they track an index. If you want to make a lot of money in a bull market, index funds are a great place to start. During a market downturn, though, you’ll have to switch to actively managed funds. Because during bear markets, index funds tend to lose value. As a result, having a mix of actively managed funds and index funds in your portfolio is recommended.

    Return

    As we have mentioned before, the returns from index funds will be very similar to index benchmarks as it simply replicates its moves. These funds aren’t trying to outperform the benchmark, but rather to copy it. However, due to tracking issues, the results generated may not be on par with the index. There may be differences in actual index returns. As a result, before investing in an index fund, it is recommended to select funds with the lowest tracking error. The smaller the errors, the better the fund’s performance.

    Investment cost

    Since index funds are passively managed, their expense ratios are much lower than that of actively managed mutual funds. This is because there is no investment strategy from a fund manager – they simply monitor the weightage of stocks in an index and manage that in an index fund. As a result, the expense ratio differs. Any two index funds that track the Nifty will produce similar returns. The expense ratio will be the only change. Because the fund has a reduced expense ratio, it will yield larger returns on investment.

    Time frame

    Individuals with a long-term investment horizon will generally benefit from index funds. Typically, the fund sees a lot of volatility in the short run, but over time, say more than seven years, it averages out to generate returns in the 10% -12% level. Those who invest in index funds must have the patience to wait at least that long. Only then will they be able to appreciate its returns.

    Goals

    Long-term financial goals, such as wealth accumulation or retirement planning, may be best achieved using equity funds. These funds are high-risk, high-return sanctuary and can help you build wealth and possibly retire early. Therefore, if your objective is to earn more than the index benchmark, then index funds might not be the one for you.

    Taxation


    Because index funds are a type of equity fund, they are taxed similarly to other equity fund plans. An index fund’s dividends are added to your overall income and taxed at your marginal tax rate. Index funds are taxed at different rates depending on how long they are held. Short-term capital gains are realised when you redeem your units during a one-year holding period. These profits are taxed at a 15 per cent flat rate. Long-term capital gains are gains realised when you sell your fund units after a one-year holding period. However, if your gains are under Rs 1,00,000 per year, they are tax-free. Any gains in excess of this amount are subject to a 10% tax rate, with no indexation.

    If you choose to go for an index fund, there are several options for you to choose from. A few of them include ICICI prudential NV20 ETF, UTI Sensex ETF and SBI ETF Nifty Next 50. You can explore these options and more with Zebu. Our lowest brokerage fees allow you to purchase the index fund of your choice effortlessly, making yours one of the best trading accounts. As one of India’s leading share market brokers, we will help you make the right decision when it comes to index funds.

  • Signs That You Need To Change Your Mutual Funds Scheme

    You conduct research, select a mutual fund plan that meets your aims, budget, perform all kinds of analysis, and then invest in a mutual fund scheme. Then, when the investment period comes to a close, you can reap the rewards of capital growth. It is as simple as that, right?

    Not always. Investing in a mutual fund entails more than just putting money into it and waiting for it to pay off at the end of the investment term. To truly enjoy its full benefits, more effort is required from your end to constantly monitor and analyse various parameters of your portfolio. To achieve optimal capital growth, you must keep a careful eye on it and manage it well during the investing period. Sometimes, switching between funds is necessary to avoid market risks, avoid fund underperformance, and avoid fund performance stagnation.

    Signs that you need to change your mutual find scheme

    Change in investment goals

    Before you begin investing in mutual funds, you must first devise a strategy that is tailored to your specific objectives, risk appetite, investment horizon, budget, and other objectives. The type of mutual fund schemes you should invest in is determined by these criteria. Mutual fund investments can be divided into three categories based on their investment horizon: short, long, and intermediate. Risk appetites are divided into three categories: aggressive, moderate, and conservative. It is important to keep your expectations in check in terms of the kind of profits do you hope to get from your mutual fund investment. In this instance, mutual fund schemes might be classified as income-oriented, balanced, or growth-oriented.

    When investing in a mutual fund scheme, you may have had a certain goal in mind. But what happens if your goal shifts in the middle of the project? You can switch between funds in this situation to suit your new investing goal, horizon, and risk tolerance.

    On a side note, one of the first things to keep in mind when it comes to investing in mutual funds is to identify the top brokers in share market . Zebu is a leading online share broker that offers one of the lowest brokerage fees when it comes to investing in mutual funds. Read on to know more about when to change your mutual fund plans.

    Your scheme is underperforming

    There’s no guarantee that the mutual fund scheme in which you invested will perform well over time. You may have analysed prior fund performance and tried every permutation and combination to find the right mutual fund investment for you. Despite your best efforts, you never know when your scheme will underperform or become vulnerable to hazards, even in favourable market conditions. To ensure that your portfolio does not become stagnant, you must switch to a different fund. To keep the portfolio balanced, over-weight mutual funds should be rotated.

    You simply feel like you made the wrong choice

    When it comes to even the safest investment options, mistakes are bound to occur (especially if you are doing the research by yourself). Fortunately, investing in mutual funds is not one of them. Worry not if you bought in a mutual fund without doing your homework or understanding key technical features, only to discover later that it isn’t a good fit for your goals or risk tolerance. Your current assets can easily be reallocated into a portfolio that matches your needs.

    In the world of mutual fund investing, erroneous predictions are more common than you would think. Sometimes, even seasoned fund managers can get their analysis proved wrong. For these reasons and more, it is crucial that you keep a close eye on your mutual funds and keep your options open and diverse. Apart from this, to maintain balance and enhance fund performance, an investor should rotate the assets in his or her portfolio on a regular basis.

    With Zebu’s seamless investment platform, which is one of the top brokers in share market, you can get started with direct mutual funds and make more than 1% of the returns you would otherwise make with managed mutual funds. And with our lowest brokerage fees, you can confidently make changes to your scheme as per your requirements. We are, in fact, one of India’s leading online sharebrokers.

    To know more, please get in touch with us now.