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Mutual Funds: You can be part of India’s growth potential with the help of broader market index funds. Pic: livemint.com
The robust growth of India’s economy directly correlates with the performance of its equity markets. As sectors like services and agriculture expand, they boost investor confidence, thus increasing market participation and helping higher valuations. This positive sentiment in the equity markets, in turn, encourages further investment in these growing sectors, creating a virtuous cycle of economic and market growth.
In the last decade, India's equity markets have shown impressive growth. The BSE Sensex, around 25,000 in 2014, has more than tripled to approximately 80,000 Similarly, the Nifty 500 increased more than twice over the last 5 years. Despite periods of volatility, the equity market’s resilience and growth trajectory have been noteworthy.
India boasts a diverse investment landscape, from established financial giants to innovative startups. But navigating this vastness can be challenging. Here's how investing in broader market index funds empowers you:
What is a broad-based index?
According to Investopedia, a broad-based index is designed to reflect the movement of a group of stocks or an entire market—also called a market index. One of the broad-based indexes with the fewest stocks is the Dow Jones Industrial Average (DJIA), which has just 30 stocks. One of the largest is the FT Wilshire 5000 Index (FTW5000). Other examples of broad-based indices include the S&P 500 Index and the NASDAQ Composite Index.
- A broad-based index is a benchmark used to track the performance of a large group of stocks picked to represent the broader stock market.
- Owning funds that track broad-based indexes can add diversification to a portfolio.
- Examples of broad-based indices range from the S&P 500 and NASDAQ Composite to the Russell 3000.
- Many broad-based indices are market-value weighted, which means that large companies have a greater influence on the index's price changes compared to smaller companies.
Exposure to market dynamism
Beyond established large-cap companies, broader market indices encompass exciting mid and small-cap companies. These represent the future of the Indian economy, brimming with innovation and the potential for high growth. By investing in a broad market index fund, investors get automatic exposure to this untapped potential alongside the established giants. Furthermore, by spreading investments across different sectors, investors become less vulnerable to downturns in a single industry.
Markets are inherently dynamic, with sectors and companies taking turns leading the growth charge. Broad market index funds, by design, are constantly adjusting to reflect this dynamism. They automatically rebalance as companies' market capitalisations change, ensuring the portfolio stays aligned with the evolving market landscape.
Understand risk as a spectrum
Instead of a binary win-or-lose scenario with individual stocks, broader market funds expose investors to a spectrum of opportunities. The diversification across sectors and market capitalisations means poor performance in one area can be offset by strong gains in another. This allows investors to observe the market's historical risk-reward spectrum, providing valuable context for their own investment decisions.
The very nature of a broad market index is that it inherently balances risk and reward. This allows one to experience the market's overall risk-reward profile. To conclude, investors must understand that broad market index funds are passively managed, mirroring the constituents of a chosen index. This allows investors to passively learn from the market's collective wisdom. Over time, the index's composition reflects the sectors and companies driving India's growth, providing a real-world education on risk and reward dynamics within the Indian market.
Investing in a broader market index fund offers a way to capture India's long-term growth story. Investors can gain exposure to a diversified basket of companies, benefit from automatic rebalancing, and enjoy a cost-effective strategy while minimising the need for constant market monitoring and stock selection.
Note: The sectors mentioned above are only used to explain the concept and It should not be construed as investment advice.
By arrangement with livemint.com
