Star investor Warren Buffett in 2007 placed a $ 1 Million bet where the selected indexed funds over a basket of select fund managers. The terms of the bet were that the performance of an S&P 500 index fund will be compared with the performance of a basket of fund managers over the course of 10 years. And guess what, Warren Buffet won the bet in 2017 as the S&P 500 fund returned a compounded annual return of 7.1% as compared to 2.2% by the basket of fund managers over the course of 10 years.

Now, let’s understand. What is an index fund?

An index fund is a type of MF scheme which invests in a pre-defined set of stocks of an index. This fund allocates money in exactly the same proportion as per the weight of an index. In other words, an index fund is a passively managed fund where the fund manager just buys and holds stocks that form a part of an index and exactly in the same proportion.

it is absolutely obvious to say that index funds track the performance of the index and as a result will give the same return as the index. Some funds are also designed to track tailored indexes that track specific sectors or geography. So when that particular sector or geography performs well, the index will perform well which in turn makes the performance of the fund better.

Here are some of the reasons one should invest in index funds.

One key advantage of investing in an index fund VS a regular mutual fund is that the index funds operate at a very low expense ratio compared to an ordinary mutual fund. To see this practically, we have compared UTI Nifty Index Fund with HDFC Top 100 fund which is a large-cap focused fund managed by one of the most respected fund managers in the business.

As you can see here, there is a drastic difference in their expense ratios. The expense ratio of the index fund is 0.17% while the expense ratio of HDFC top 100 is much much higher at 2.08%. Another point to notice is that the index fund doesn’t have an exit load, unlike an ordinary fund.