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Business News/ Mutual Funds / Index mutual funds: 5 key reasons to invest in them during bull run
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Index mutual funds: 5 key reasons to invest in them during bull run

Index mutual funds create a portfolio which mirrors a market index. The securities included in the portfolio and their weights are the same as that in the index.

The fund manager does not rebalance the portfolio based on their view of the market. Premium
The fund manager does not rebalance the portfolio based on their view of the market.

Broader market indices have made a record run in the recent past. Notwithstanding the crash on Thursday, Nifty50 has risen significantly in the recent past. 

New records are made only to be breached within a few weeks, if not days. 

Emkay Institutional Equities predicted Nifty50 to climb 11 per cent and touch 24,000 by December 2024.

This is the kind of rally, which invariably lifts all boats. Investment advisors, therefore, advise small investors to simply mirror the broader index instead of taking an investing call time and again.  

Let us first understand what exactly index mutual funds are.

Index mutual funds

Index mutual funds create a portfolio which mirrors a market index. The securities included in the portfolio and their weights are the same as that in the index. 

The fund manager does not rebalance the portfolio based on their view of the market. These funds are passively managed, which means that the fund manager makes only minor, periodic adjustments to keep the fund in line with its index. 

These funds, therefore, offer the same return and risk represented by the index it tracks. The fees that an index fund can charge is capped at 1.5 per cent.

Five key reasons to invest in index mutual funds 

1. Index on a rise: This year is likely to be good for the large caps in general, predict investment experts. So, investors are recommended to invest in index mutual funds.

“It is a good time to get an exposure to index mutual funds when the spike is expected in large caps whereas small and mid-caps have already hit their highs," says Sridharan Sundaram, founder of Wealth Ladder Direct.

ALSO READ: Investors should reexamine their perceptions during the bull run. This is how

2. Overpriced markets: As of now, the price to equity (P/E) ratio of Nifty50 hovers around 22.66 while the average P/E ratio is 20. This makes conservative investors wary of investing more money in the risky categories and stocks. 

This makes index funds relatively safer, albeit not devoid of risk altogether thanks to the high valuation.

3. Small caps are trading on premium: When the market undergoes a bull run, small caps become increasingly more prone to volatility. It is, therefore, advisable to opt for safer mutual funds such as index funds instead of volatile small caps. 

4. Safe investment: In the long run, index mutual funds tend to rise over a period of time. So, investing in index mutual funds is considered safer vis-à-vis other investment options.   

"Index funds typically excel during narrow bull runs or in falling markets but might underperform in broad-based, secular rallies. However, over the long term, such discrepancies tend to balance out. Thus, investors seeking index-like returns, albeit slightly lower due to expenses and rebalancing costs, may find index funds suitable regardless of prevailing market conditions," says Deepak Gagrani, Founder, Madhuban Finvest.

5. Gaining prevalence: Index funds have become increasingly more popular in terms of number of schemes and the total asset size. As of now, there are 197 index mutual funds and the total inflow into these schemes stood at 2,988 crore in January. In December, the corresponding data stood at 703 crore. 

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Published: 09 Feb 2024, 03:16 PM IST
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