Index funds explained in 60 seconds ⏰

Index funds are passively managed funds. But what does that mean?

Mutual funds are nothing but a collection of stocks, managed by a professional fund manager.

There are two fund-management styles: active and passive. In active investing the fund manager pro-actively decides which stocks to buy, sell and hold based on their own research and market outlook.

On the other hand, in passive management, the fund manager simply tracks or copies a well-known stock index, such as the SENSEX or the NIFTY 50.

Typically, index funds are cheaper, i.e., have a lower expense ratio than active funds.

One no-brainer use case for index funds is to invest in the large cap category. In the large cap space, it's very difficult to get higher returns than the index. So if an active fund isn't getting you higher returns, then you might as well save on fees by using an index fund.

For example, the SBI bluechip fund fee is 0.87%, whereas the SBI NIFTY 50 Index Fund costs 0.18%. That's less than 1/4th the price.

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