All-powerful index transforms investing in mutual funds

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While complying with the set limits, every fund house has a different expense ratio that varies with the investment strategy. Also, if you invest through index funds, the expense ratio will be a lot lesser as these are passive funds and require less effort from the fund manager. On the other hand, active funds attract higher expense ratios as they require considerable industry experience and expertise to drive desired results from investments.

Most tax-saving funds in India have an expense ratio ranging from 0. A mutual fund expense ratio is one of the essential factors that investors must consider before investing. That is so because fund operating and management fees directly impact your returns.

While a lower expense ratio means more profitability to your account, a higher expense rate can considerably lower your profits. Let's take an example of the expense ratio and try to understand how they are calculated and their effect on net investment profits.

Consider two mutual funds, A and B. The impact of the expense ratio is more significant, especially if the rate of return is less. Hence, it is imperative to be aware of the fund house charges beforehand, so you choose the index funds with the lowest expense ratio in India. How to reduce the expense ratio on your investments Every service or product comes with a fair share of the price tag, and so are mutual funds that levy investors a fee as an expense ratio for their portfolio management.

While one cannot avoid these fees, certain ways will help reduce the overall investment cost. One of the easiest ways to cut your investment cost is to move into a passive investment. You can invest in the best index funds in India with the lowest expense ratio that tracks an underlying index or ETFs that trade in real-time, like stocks.

Remember, a lower expense ratio doesn't impact your fund's performance. They are also capable of providing better and higher returns on investments. So you must compare the expense ratios of various fund schemes and decide on the one offering the better deal.

Avoid trading frequently: If you have invested in mutual funds and regularly trade and contribute to an account, you can think about waiting a little longer to make purchases until you build up a larger amount of cash and then transact. Doing so will have fewer transactions and related fees, thus helping you reduce your investment cost. Costs other than the expense ratio associated with mutual funds Apart from the expense ratio, there are additional charges as well that have to be paid by the investors as part of their investment in index mutual funds.

Stamp duty: Stamp duty is basically a tax that investors incur on purchasing the fund units. As per the current SEBI laws, stamp duty gets applied at a rate of. Suppose the fund units get issued for an investment of Rs 1 lakh in a scheme, then a tax of Rs Rs 5 as stamp duty has to be paid by the investor. It's a one-time charge but applies to every purchase you make.

Entry load: A fee investors pay while entering a fund scheme. Different funds have different entry load charges. However, not all mutual funds ask for it. However, if you decide to invest in multiple funds, you still have to decide how much to invest in each fund type. In general, younger investors planning for retirement should consider putting a larger allocation of their portfolio in higher-risk investments, such as stocks, since they have more time on their side before needing the money.

The closer someone is to retirement, though, the more they may want to consider shifting a larger chunk of their holdings into bonds or other lower-risk assets since they are less likely to lose value in the short term. Advantages and disadvantages of index funds Index funds are ideal for new investors, but they have their fair share of advantages and disadvantages.

Advantages of index funds Low fees. Index funds simply track an index; they are not typically actively managed. This allows fees to stay on the low side. Some index funds today even have no fees at all. Built-in diversification. Because index funds track an index, they are inherently diverse.

Thus, these funds provide instant diversification. Minimal maintenance. When you buy index funds, rebalancing your portfolio may be less needed. If you were to put all of your money in a single index fund not necessarily recommended , the fund itself handles all of the shifting allocations for the constituents in the index. Tax efficiency. Because index funds are not actively managed, they buy and sell stocks infrequently.

This helps reduce capital gains taxes you might otherwise incur. Disadvantages of index funds No ability to select stocks in the index. For beginners, it can be nice having everything done for you. Can be less diverse than expected. Index funds are market-cap-weighted, meaning they invest more of their money in companies with higher market caps.

So larger companies make up a bigger share of a given index. For more news you can use to help guide your financial life, visit our Insights page. All rights reserved. Send to Separate multiple e-mail addresses with commas Please enter a valid e-mail address Your E-Mail Address Please enter a valid e-mail address Message Optional Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know.