- Most of the mutual funds are actively managed and thus cost higher compared to index funds as they follow a passive investment strategy. Any mutual fund expense ratio is also known as management expense ratio which includes the payment to advisors, fund managers, transaction fees, taxes and accounting fees. But in index funds, managers simply replicate the performance of indices and do not require the efforts of research analysts, fewer transactions and commissions. Thus, it lowers the cost of fund management and has a low expense ratio.
- It has seen globally that the markets are becoming more efficient and therefore, it is hard for asset and fund managers to beat the benchmarks. So, as much the market becomes efficient, the demand for index funds will increase.
- Index funds allow investors to invest in the basket of securities and thus reduce the risk as a single stock has limited exposure but the index has vast.
- Most of the indices consist of the outperformers and removes underperformers, and therefore, these funds also clean-up automatically the underperforming companies.
Therefore, the investors who want to diversify their capital in selected securities with low-cost can invest in index funds as a single fund provides exposure to thousands of securities. This also lowers the overall risk of investing in equity. Besides this, index funds returns are also decent compared to many other mutual funds.
