Glide Invest FAQ: Why should you invest in index funds?

Why should you invest in index funds?

  1. Low Cost: Since index funds are passively managed, the total expense ratio (TER) is very less as compared to the actively managed ones. While an actively managed fund may charge you anything between 1-2% as TER, an index fund would typically charge you between 0.20% and 0.50%. At face value, the cost difference may seem small but in the long run, it can become as large as 15% of net returns.
  2. Diversification: The biggest benefit of mutual funds is diversification. Holding a basket of stocks is proved to be a lot safer than holding individual securities. An index fund has proved to be more diversified since it does not invest in any particular sector, theme or a strategy. Hence lower risk.
  3. Minimal Scope for bias: Since the allocation of assets in case of index funds is not at the discretion of the fund manager, there is no scope of making losses due to inefficiency in asset allocation or poor management.
  4. Choices: Some index funds track broad market indexes (like large-cap, mid-cap etc.). Meanwhile, others track specific sectors or industry groups thus, offering a wide range of choices.
  5. Tax efficiency: There is little to no churn in investing in an index. Therefore – tax is minimized
  6. Returns: The average mutual fund typically fails to beat the broad indexes. With this in mind, index funds are a great way to capture broader-market returns.
  7. Better Risk Management: Index funds enable easier risk management due to the stability of its portfolio and the weights. In addition, it’s clear that a large cap index is less risky/volatile than a small-cap. It may not be clear for other non-index funds.
  8. Long-term investing: Fund managers change, most active funds underperform and funds close down all the time. Index funds negate all of the above. Therefore, great for investing for 10 years+.

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