Stock Market Tips: If you want returns like capital market, then invest in index fund, there is less risk here

Stock Market Tips: If you want returns like capital market, then invest in index fund, there is less risk here

You have to invest in the share market, but information is limited, what happened, is there a mutual fund? But many times there is a complaint of investors that at one time the stock market performed well, but the fund in which they invested did not show any special performance. 

This happens because the fund managers of most mutual fund schemes actively create a portfolio and the fund managers decide which stocks to hold in that portfolio, when to buy and when to sell. Therefore, such funds are called actively managed funds.

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It is the effort of the fund manager to give investors more capital than the average returns of the stock market, but sometimes the stocks chosen by the fund manager fail to perform as expected and the result is that the stock market Despite being a good performer, some funds are not able to perform as well. 

In such a situation, if the investor wants to get the same returns as the capital market, then the index fund can be a good choice. However, not only equity index funds, but bond index funds are also available for investment.

What is an index:

Thousands of companies are listed in the stock market, but to represent the market, some indexes have been made for the shares of select companies. These indexes act as a barometer for the stock market. This helps the investors to understand the movement of the market. These indexes are based on the size and sector, etc. of the companies.

For example, the BSE's flagship index Sensex is based on 30 select companies, while the Nifty index consists of 50 select companies at one time. Based on the performance of these selected companies at any given time, it can be estimated how the stock market has been doing, although this does not mean that all the stocks have performed in the same direction.

Similarly, indices like BSE Small-Cap and BSE Mid Cap have been created based on the size of companies. There are also indexes such as Nifty Bank or Nifty Pharma depending on the sector. Investors can also invest in bond-based indexes such as the Bharat bond index. 

Why invest in index funds:

Index funds are passive funds in a way because they invest in an index. These funds do not require any special skills to build a portfolio but invest in the particular index that the fund tracks.

In such a situation, if the investor invests in a nifty index fund, the performance of that fund will be similar to that of a nifty. Any mutual fund scheme runs an index as a benchmark and the fund manager aims to outperform that benchmark, but many times investors feel frustrated.

This is unlikely if you invest in an index fund. The performance of any index fund will be equal to the index on which it is based. An actively managed mutual fund has a higher risk than an index fund. For the new investors who want to earn profits based on the capital market with limited risk, the index fund is a great choice.

Comparison between index funds and ETFs:

ETFs are essentially index funds. The only difference is that a normal index fund acts like a mutual fund, whereas an ETF is listed on the stock exchange just like a stock. The NAV of an index fund is fixed only once a day after the capital market closes, whereas the value of an ETF varies as many times a day as in any stock.

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An investor must have a Demat account to invest in an ETF index fund. When the market is very volatile, opportunities to invest and sell in ETFs can be found and attempts can be made to buy at the lower levels of the day and sell at the upper levels.

Tax on index fund:

Index funds can be based on asset class such as equity, debt or gold, so long-term and short-term capital gains tax is calculated here like any other fund. If you invest in an index fund based on the stock market, then one year or less is considered as short term and more than one year is considered as long term.

The short-term capital gains tax on such index funds is 15.60 percent. During a financial year, there is no tax on long-term capital gains of up to one lakh, but capital gains of more than that mean that capital gains are levied as long-term capital gains tax of 10.40 percent.

All other equity funds, such as Bond ETF or Gold ETF, except equity, invest short-term investment of 3 years or less, and investment of more than 3 years is called a long-term capital asset.

Here the short-term capital gains tax is determined on the basis of the total income of the investor, while the long-term capital gains tax is 20.80 percent with the benefit of cost inflation indexation.

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