If you're someone who wants to start investing but feels overwhelmed by too many options, you're not alone. Many new investors feel confused about where to begin, how much to invest, and what to choose. The good news is that you don't need to be a market expert to start your investment journey. A simple tool, index funds, may help you build a rounded and diversified portfolio without stress.
Index funds follow a market index, like the Nifty 50 or BSE Sensex. So instead of trying to pick stocks, you invest in a basket of companies automatically. It's a straightforward, relatively low-cost way to participate in the market while potentially managing risk.
Let's walk through how you can use index funds to create a balanced portfolio, and how simple tools like an index fund calculator and SIP return calculator can guide your decisions along the way.
Why index mutual funds are beginner-friendly
A challenging part of investing is deciding where to put your money. Index funds may help with that. Falling under the category of passive funds, index funds mirror a market index and seek to replicate its performance (subject to tracking error, which is the difference between a fund's performance and that of the index).
Since an index is spread across multiple stocks or sectors, your portfolio is not dependent on the performance of just one or a few stocks. Moreover, unlike actively managed funds, where the fund manager seeks to potentially outperform the market over time through strategic stock selection, the goal of an index fund is to match its index's returns. So, your portfolio is linked to how the market behaves. This reduces the risk of fund manager bias - though that also means your investments don't have market-beating potential.
This passive management style also translates to lower costs. Since the fund manager has a comparatively lesser role to play with index funds, the expense ratio is lower than that of actively managed funds. A lower expense ratio means more of the potential returns stay with you.
Some simple benefits of index funds include:
- You get diversification without effort
- Costs are usually lower
- You don't have to track the market every day
- You follow a clear, rules-based approach
It's almost like putting your investments on autopilot-simple, and transparent.
Past performance may or may not be sustained in future.
What does diversification mean?
Diversification is simply the investing equivalent of the saying "don't put all your eggs in one basket." It means spreading your money across different companies, sectors, asset types or even countries, so that underperformance of one potentially doesn't drag down your entire portfolio.
Index funds also help you diversify instantly. For example, a Nifty 50 index fund gives you exposure to 50 large companies from various industries, all with a single investment.
A simple step-by-step way to build your diversified portfolio
1. Begin with your goals
Think about why you're investing.Is it for a future vacation? Buying a house? Your child's education? Or retirement? Your goals decide how much risk you may take and how long you'll stay invested.
2. Choose a mix of index funds
A diversified portfolio doesn't rely on just one fund. You may think about including:
- Large Cap index funds (like Nifty 50/BSE Sensex) for relative stability
- Mid Cap index funds for higher long-term growth potential
- Broad market indices (like Nifty 500) for wider coverage
- International index funds for global exposure
3. Allocate your money wisely
Your allocation depends on your comfort with market ups and downs.For example:
- Investors who seek equity investments but want to reduce risk may keep most of their money in large cap funds
- Growth-oriented investors with a higher risk appetite may add some mid cap exposure
- Aggressive investors may consider small cap indices
4. Start with SIPs to stay consistent
Systematic Investment Plans or SIPs are an easy way to maintain investment discipline. You invest a fixed amount at regular intervals, no matter how the market is doing. This may help smooth out market ups and downs over time and build a habit of investing regularly.
A SIP return calculator can show you how your monthly investments may grow over the years. Based on your SIP amount, tenure and expected returns, the calculator projects your final potential corpus, helping keep you focused and motivated. Do note, however, that the calculator assumes a fixed rate of return for its investments. Returns tend to fluctuate and are not guaranteed.
5. Plan with an index fund calculator
An index fund calculator helps you estimate future potential returns based on your investment amount and time horizon. Think of it as a guide, it doesn't predict what will happen, but it helps you make informed decisions.
If you're unsure whether you should invest more, switch funds, or adjust your timeline, the calculator may give you a detailed picture.
The calculator is an aid, not a prediction tool. It may provide only an indicative picture.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.
The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Limited does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on prevailing laws at the time of publishing the article and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.
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