How to use Index Funds? #investment

Summary

In this episode of 'Investors Hangout,' Dendra Kumar discusses the growing popularity of index funds, emphasizing their simplicity, low cost, and the significant inflow of funds due to government mandates. He advises a long-term investment strategy, suggesting a basic portfolio with a mix of aggressive hybrid funds and index funds like Nifty or Sensex. For more sophistication, diversify across market caps and consider international funds. Selecting the right index fund involves comparing costs and tracking errors. Small cap funds are recommended for the long term but come with risks, as they can fluctuate significantly.

Takeaways

• 📈 **Index Funds Popularity**: Index funds are gaining popularity due to their simplicity, low cost, and the increasing number of options available.
• 💼 **Long-Term Investment**: The script emphasizes the importance of investing in index funds for the long term, highlighting their resilience despite market fluctuations.
• 💡 **Simplicity in Investing**: Dendra Kumar suggests keeping investments simple, such as allocating 25% to debt funds and 75% to Nifty or Sensex funds for a basic portfolio.
• 🌐 **Full Market Exposure**: For a more sophisticated portfolio, diversify across large-cap, mid-cap, and small-cap index funds to achieve full market exposure.
• 🔄 **Portfolio Churn**: Even though index investing is considered passive, the composition of the portfolio can change as the constituents of the index change.
• 🌍 **International Diversification**: To further sophisticate a portfolio, consider adding international funds like the NAS 100 index for global diversification.
• 📊 **Total Market Exposure**: For low-maintenance portfolios, consider investing in a total market exposure index fund that provides a well-spread diversification across all market sectors.
• 🔍 **Choosing the Right Index Fund**: When selecting an index fund, focus on the cost (expense ratio) and the tracking error to ensure the fund closely replicates the index.
• 🚫 **Avoid Overthinking**: The script advises against overthinking the choice between different index funds like Sensex or Nifty, as the long-term difference is minimal.
• 📉 **Risk of Small Cap Funds**: While small cap funds have high potential returns, they also come with higher risk, as seen in the 2008 market crash where they fell by 58%.
• 🏆 **Performance of Small Cap Funds**: Historically, small cap funds have outperformed other diversified vehicles over the long term, with impressive returns over 10 and 20 year periods.

Q & A

What is the main purpose of the 'Investors Hangout' video series?

The main purpose of the 'Investors Hangout' video series is to educate viewers on savings and investment issues, with a focus on index funds as a means to balance low risk and good returns.

Why have index funds become popular recently according to the transcript?

Index funds have become popular due to their simplicity, low cost in terms of asset management, and the increased variety of index funds available in the market, which has led to greater awareness and investment, especially after the EPFO started investing in equity through index funds.

What is the basic rule of investing in index funds as mentioned in the script?

The basic rule of investing in index funds is to invest for the long term, using a systematic investment plan (SIP), and to avoid panic selling during market downturns.

How does the script suggest building a simple yet robust portfolio using index funds?

The script suggests investing 25% in a debt fund and 75% in a large-cap index fund like Nifty or Sensex for a simple and robust portfolio, which is low cost and easy to understand.

What is the recommended allocation for a more sophisticated portfolio in terms of market capitalization?

For a more sophisticated portfolio, the recommended allocation is 50-70% in large-cap, 20-40% in mid-cap, and 10-30% in small-cap index funds, depending on the investor's risk tolerance.

Why is it suggested to include an international fund in a sophisticated portfolio?

Including an international fund, such as a Nasdaq 100 index, provides diversification and exposure to global markets, which can help in managing risk and potentially enhancing returns in a sophisticated portfolio.

What is the significance of the total market exposure index mentioned in the script?

The total market exposure index is significant as it provides a well-spread diversified exposure to all sectors and segments of the market, making it suitable for investors who want a low-maintenance portfolio with broad market coverage.

How should one choose the best index fund according to the transcript?

One should choose the best index fund based on the lowest cost (expense ratio) and the lowest tracking error, which can be found in the Index Fund scorecard provided by the mutual fund Insight magazine or the website.

What is the viewer's question about investing in small-cap funds for a 15-year period?

The viewer's question is whether it is okay to invest in small-cap funds for a long term of 15 years, considering the risks and potential rewards.

What is the response to the viewer's question about small-cap funds for long-term investment?

While small-cap funds have the potential for high returns, as evidenced by their historical performance, they are not recommended for new investors due to their high volatility. However, for those who can withstand market fluctuations and maintain a diversified small-cap portfolio, they can be a winning investment over the long run.

What is the historical performance of small-cap funds over different time periods as mentioned in the script?

Over the last 10 years, small-cap funds have given a return of 23%, the highest among diversified vehicles. Over the last 20 years, the small-cap total return index has been the best-performing index, and even in the last five years, it has been the best-performing fund with nearly 25% returns.