Planning your retirement with Index Funds

Mutual Funds


May 22, 2023

🏖️ Picture this: you’re 50 years young, lounging on a beach, taking in the breathtaking views, and sipping on your favorite margarita 🍹! Sounds like a retirement dream, right? 

But… How do we actually make this happen? 

Planning for retirement can be daunting, especially with the amount of information and assets available to invest in! So, today we’re going to talk about one of the easiest weapons you have in your arsenal while planning for your retirement - Index Funds! 

🤔 Wait, but what’s an index fund?

An index fund is basically a mutual fund that mimics a specific index (a pool of stocks), such as the Nifty or Sensex. It does this by investing in the same stocks that form the index. 

Your typical index funds will mimic either the Nifty 50, or the Sensex, or even the S&P 500. This means that with a Nifty 50 index fund, your money will be invested in the 50 stocks that form Nifty. It will also have the same allocation in the 50 different stocks, as Nifty does. For example, if Infosys forms 7.5% of the Nifty Index, 7.5% of your money will go to Infosys in an index fund. If a new stock enters the index, then the fund will also buy into the new stock, and drop the stock that has been removed from the index.

👉 With an index fund, no fund manager is actively taking decisions on which stocks to buy and which to sell. The fund is passively maintaining and matching the stocks that form the index.

We usually see how the “markets” are performing by looking at the performance of an index like Nifty or Sensex. Thus, the idea of an index fund is that by copying the stocks of the index, you are getting returns that are equivalent to the index (i.e. the market) itself. 🧠

But, why index funds? 

Index funds are a great way to invest in the long term, at a very low cost. 

1️⃣ All funds charge something called an expense ratio - this is the charge they take to manage your funds. Say, if a fund gives you returns of 10%, but the expense ratio is 2%, your net return will be 8%. 

Now, here's the beauty of index funds—they boast lower expense ratios than regular mutual funds. Why? Because index funds don't involve fund managers handpicking stocks. Among Nifty 50 index funds, you'll find expense ratios currently between 0.1% - 0.5%, while other mutual funds will have expense ratios <2.25%! So, it truly is a very low cost way of investing. 

2️⃣ With index funds, you get the return that the “market” is giving in the long term. Period. There’s no fund manager trying to think of strategies to beat this return (and this could go well or worse). If Nifty were to give returns of 12%, the fund will also (almost) match the 12%. In the long term, index funds are a great way to reduce this fund manager risk and get the returns that the markets will generally provide. 

Ofcouse, in any case, make it a habit to invest regularly through SIPs 📈. For retirement planning, aim to invest for a decade or more, and witness your money passively grow. 

Questions? Head to the community section and ask away!

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