Decoding Index Funds
Index funds are a special type of mutual funds which is passively managed. These funds are also
known as passive funds. These funds are being offered as another option available to investors
to invest in the Indian equity markets, especially for investors who want only index returns or
risk averse investors, who do not want to take stock specific risk
Salient features of Index Funds:
- Index funds create a portfolio that mirrors a market index like S&P BSE Sensex, NSE Nifty50, Nifty Next 50
- The securities included in the portfolio and their weights are approximately same as that in the index
- The fund offers the approximately same return and risk represented by the index it tracks and are also subject to tracking errors.
- The total expense ratio that an index fund can charge is capped at 1.%
- Investors have the comfort of knowing the stocks that will form part of the portfolio, since the composition of the index is known
Taxation of Index Funds
When you redeem units of index funds, you earn capital gains, which are taxable. The rate of taxation depends on how long you stayed invested in index funds, i.e., the holding period. Capital gains you make during the holding period of up to one year are called short-term capital gains (STCG). STCG is taxed at a rate of 15%.
Similarly, capital gains you earn after a holding period of more than one year are called long- term capital gains (LTCG). LTCG over Rs 1 lakh is taxed at 10% without the benefit of indexation.
- Investors seeking returns similar to index
- Investors who are risk-averse
- Best suited for those investors who have a long-term investment horizon
- Suitable for those who have an investment horizon of at least 7 years The allocation level to passive funds in one’s portfolio depends on the risk appetite of the investor. Investors who are just getting their feet wet in the stock market could allocate more to index funds. It is best that investors seek an advisor’s help to decide the ideal allocation.
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Disclaimer – This information is for general information only and does not have regard to particular needs of any specific person who may receive this information. L&T Investment Management Limited, the asset management company of L&T Mutual Fund or any of its associates; does not guarantee/indicate any returns/and shall not be held liable for any loss, expenses, charges incurred by the recipient. The recipient should consult their legal, tax and financial advisors before investing. Recipient of this information should understand that statements made herein regarding future prospects may not be realized or achieved.
The returns from mutual funds are subject to market fluctuations while returns on savings account, fixed deposits and bonds are fixed.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.