Hello guys, hope all of you are fine by the grace of god. Today I am going to talk about the errors that i have made in the index funds. I know how much painful that error was and that’s why I want to share that mistake with all of you guys so that you will not repeat the mistake which i did. But let me clear one thing that you can learn investing only with the help of trials and errors and don’t be ashamed of making mistakes in your investment journey because the more you make mistakes, the more you will learn in investing.
First of all, you have to understand some basic things about index funds. Index fund is nothing but a kind of mutual fund that tries so hard to replicate the index. For example, today nifty is down by 0.45. In this case, that particular index fund will also goes down to 0.45. This the most simplest way you can understand about the index funds. So below are the some important mistakes you should avoid while investing in the index funds
1. Avoiding AUM
The first and important mistake i have done while investing money in index fund is that i did not give that much importance to the. AMC of that AMC. Here, full form of refers to Asset Manegement company.
Index fund is just like mutual fund where the fund managers manage our asset but the thing is that index funds are slightly different from the active mutual funds. In Active mutual funds, the fund managers tries to beat the market and this is the reason fund managers play an important role in active funds. So sometimes when AUM of an active mutual fund increases, it’s difficult for the fund managers to manage the money . So sometimes the fund managers can’t able to manage our money. So if you are investing in an active mutual fund, remember one thing that if the aum of an active mutual fund is very high, it doesn’t mean that the fund will perform better than any other active mutual fund. In certain cases, chances may arise where the fund managers can’t able to manage our asset properly just because he is receiving too much money from us and for this reason, he can’t generate proper return for us. So in simple words, you can say that while investing in an active mutual fund, you should not never rely only on AUM. There are also some other things you have to watch. We will discuss about it later.
But, in case of index funds, things are much more different when compared to active mutual funds. In index funds, the role of fund managers are not that much important. Because – here the main goal of a fund manager is to replicate the index properly. He doesn’t need to think about how to beat the market. Here, AUM comes into the role. So while investing in a index funds, you have to check the AUM of an index funds. If the AUM of these kind funds are high, you may consider to put your money in these funds because high aum creates trust among investors when it’s comes to index funds. Second reason give more importance to AUM is that the role of fund manager is not that much important in index funds and even heard from some articles that, in these kind of funds, there is very less human interaction.
2. Giving more importance to returns
In index funds, our main goal is to see whether the fund performs as per the index or not. For example, if today, nifty or any other index is down by – 0.45%, then the index fund in which you have invested must also goes down by – 0.45. Here, u have to watch whether index has given more returns as compared to the index or not. If the index has given more returns than the index, it means that you must avoid these kind of funds. Because the main aim of index fund is to replicate the index not to beat the index . When i started investment in index funds, i gave more importance to those funds which has given more returns than the index . It was the worst mistake of my life. I hope anyone will not repeat this mistake again.
3 Giving more importance to Expense ratio
Yes, you heard right. I don’t know about anyone, but in my case, i give more importance to Expense ratio . As i give more importance to a particular field, i forgot to see other important things. You should never purchase a index fund just because it has less expense ratio. Because apart from expense ratio, are there are other factors or not. These other factors may include tracking error, AUM (Asset Under Management) or is there any exit load for that fund etc
5. Tracking error
It is the most important things in mutual fund. You should never avoid tracking error . In certain cases there are some funds where the expense ratio of that fund is very low to attract the new retail investors but they are hiding one thing from you and that is tracking error. I am not saying that you should avoid expense ratio. Expense ratio is also very important. But from my personal experience what i have seen that some index funds reduce their expense ratio to a extent where people people thinks that this fund looks cheaper. As a result they forget to check tracking error. If the tracking error of a fund is low it means that the fund is performing very well. So u should give importance to those funds which have lowest tracking error. Here, tracking error refers to the standard deviation of the tracking difference of an index fund.
Leave a Reply