Index Fund Investing: A passive approach to long-term wealth

financialexpress.com:

In today’s complex investment landscape, index fund investing has surged in popularity as a simple and cost-effective method for accumulating long-term wealth. This article delves into the basics of index fund investing, tracing its evolution both globally and in India, while also shedding light on essential considerations before incorporating it into investment portfolios.

Index funds, whether mutual funds or exchange-traded funds (ETFs), are designed to replicate the performance of a specific market index, such as India’s Nifty 50 or Sensex. By mirroring the holdings and returns of their chosen index, these funds provide investors with exposure to diverse asset classes, market caps, or sectors without the need for active management. Since these funds don’t require large investment teams, they are typically cost-effective.

The first passive fund was launched by Vanguard in 1975 and tracked the S&P 500 Index. John C Bogle, the founder of the Vanguard Group, helped popularize passive funds. Since then, the popularity of passive funds has surged globally and within India, driven by their simplicity and cost-effectiveness. According to LSEG Lipper, in 2023, global passive equity funds’ net assets surpassed those of active equity funds for the first time, reaching USD 15.1tn, while active fund assets totalled USD 14.3tn by year-end.

In India, passive funds account for about 17% of total MF AUM compared to about 7% five years ago. While EPFO inflows have significantly contributed to the growth of passive funds in India, with approximately INR 7 lakh crores of inflows, excluding EPFO investments, passive funds have still received close to INR 1 lakh crores worth of inflows over the last five years.

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