Index mutual funds that passively track market indexes can be strategic investments to build a corpus of Rs. 5 crores and more for long-term goals. Their low costs, diversification and disciplined investing approach make index funds ideal for retail investors to create substantial corpuses through portfolio diversification.
Understand benefits of index investing
Index funds invest in securities of an underlying index like Nifty 50 or Sensex. They provide market returns by passively replicating the index without active stock picking. This low-cost passive investing helps generate higher inflation-adjusted returns over the long run. Opting for index funds cuts down expenses and minimises risks through diversification across sectors/companies.
Choose index funds across asset classes
Build a foundation with index funds across asset classes – equity, debt and gold. An equity index mutual fund like Nifty Next 50 tracks the broad market to harness India’s growth potential. A debt index fund like Nifty Composite Bond Fund provides stability.
Determine optimal asset allocation
Arrive at the right asset allocation between equity, debt and gold based on risk appetite, investment horizon and financial goals. Equity could be allocated higher weightage for long investment tenures, while debt allocation could be increased for nearer-term goals. Gold provides hedging and diversification. Rebalance allocation periodically.
Select low-cost direct index funds
Opt for direct index plans over regular plans to save on charges since index funds do not require active management. NFOs may have lower expense ratios but carefully evaluate fund managers’ track record. Analyse historical returns and tracking error of shortlisted index funds.
Invest through systematic investment plans
Systematic investment plans instill discipline and help avoid timing the market. SIPs allow periodic investments to take advantage of rupee cost averaging. Gradually build the corpus by investing consistently irrespective of market conditions. Allocate SIPs across the chosen index funds to diversify and reduce risk.
Reinvest dividends to benefit from compounding
Opt for dividend reinvestment rather than payouts. Reinvested dividends purchase more units of the fund to harness the power of compounding. This accelerates wealth creation over long investment tenures spanning 10-20 years. The reinvested units further boost returns.
Review portfolio periodically and rebalance
Review portfolio periodically to ensure allotment across funds remains aligned with target allocation. Rebalance if deviations occur over time. Rebalancing also helps book profits and buy units of underperforming assets at lower valuations. Alter allocation if risk appetite changes. Add new funds if required.
Utilise target maturity index funds
For medium-term goals, target maturity index funds with defined maturity years can be suitable. They provide active rebalancing by reducing equity and increasing debt as maturity nears. This ensures stability and takes away rebalancing effort.
Avoid the temptation to time or alter investments
Once systematically invested across funds as per asset allocation, stay invested. Avoid the temptation to frequently alter investments or time the markets. Remember, index funds work by long-term passive investing. Be patient and stay the course.
Conclusion
Prudent portfolio planning and disciplined investing in low-cost index funds across asset classes can help retail investors systematically accumulate Rs. 5 crores and more over long investment horizons. Periodic realignment and avoiding market timing are key when making mutual fund investments.
