Index Equity Fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s Nifty Index (Nifty 50).
There are two types of Fund Management – Active and Passive.
Most mutual funds fit under the active management category. Active management involves the art of stock picking and market timing. The fund manager will put his/her skills to the test trying to pick securities that will perform better than the market.
Passively managed funds do not attempt to beat the market. Passive management seeks to match the risk and return of the benchmark index such as the Sensex and the Nifty. Passive Management has the buy-and-hold approach to money management.
Types of Risks for Index Equity Funds
Market Risk also known as the Systemic Risk pertains to risk arising out of the overall performance of the stock market. Domestic and International Stock Markets are subject to un-diversifiable risk or systemic risk as any unpredictable events can destroy value for the unit holders in a short period of time.
Investment Objective –
The investment objective of the scheme is to provide return before expenses that closely correspond to the total returns of the benchmark subject to tracking errors. The difference between the index performance and the fund performance is called the tracking error.
An index mutual fund gives the investor certain benefits like broad market exposure, low operating expenses and low portfolio turnover.
Low Operating expenses are due to lower churning in the portfolio followed with passive investment management. Because passively managed funds require no research and because they experience a lower volume of trading, their expenses are lowest in the mutual fund industry.
Portfolio is only required to be churned or changed if any of the stocks get added or removed from the benchmark index.