Question

• Briefly describe how an Index Fund differs from a traditional Mutual Fund.
• Detail the the advantages and disadvantages of Index Funds?
• To what type of Investor would an Index Fund be most attractive?

Answer 1

1. Index funds are replication of indices of a stock market and it is composed if similar stocks in similar proportion while Traditional Mutual funds are mostly customized according to different risk profile and risk aversion of investors.

Index funds are mostly passive funds which doesn't change too often the composition & always replicate index while traditional Mutual funds are active funds which always keep on changing their proposition of different assets which can maximize their overall return.

Index funds are for people who are risk averse but like equity markets while traditional Mutual fund are for people who like equity markets and like risks more than who invest in index Funds.

2. Advantage of index funds are-

A. Always Return the average Return so no scope for underperformance

B. Low Cost as it is passive strategy and it has less risk associated with it.

Disadvantages of index funds are-

A. Losing the opportunity of earning more than the index is a serious disadvantage of index funds.

B. One has to be invested in non performing assets as well.

3. Index funds be attractive to investors who wants to replicate the return of index and risk averse while being in equity markets. One who opts to pay less as payments to mutual funds managers also opts for index Funds. One who doesn't have a high risk high rewards expectations can also go for investing into index funds.