Welcome back. In the last lecture, we talked about equity funds. Now, we look at another type of equity fund, which are called the index funds. index funds are types of mutual funds with a portfolio constructed to match or track the components of a market index. Now, a market index what we mean is there are many indexes which is available in the market like in us you have standard and poor 500 index, which is known as the s&p index or we in India we have nifty 50 index or BSE Sensex. Now, nifty 50 is the index which comprises of 50 companies shares which are considered in various proportions to determine what is the value of the nifty 50 index.

Similarly, basic Sensex is the index of 30 such companies. Now in these if i if i index fund is based on BSE Sensex, then this index fund would wish having shares in this 30 companies which is part of the basis Sensex. So, as in how the basis Sensex moves the index fund based on me BSE Sensex would also move. Like I said a while ago BSE Sensex is the index of 30 companies shares, which are taken in different proportions. Now, these proportions are determined by BSE Bombay Stock Exchange and these are modified occasionally from time to time, however, these are no more or less stable. Now, index fund which is based on BSE Sensex would have the shares of these companies these 30 companies in the same proportion as is considered by the Bombay Stock Exchange.

Similarly, is the case with nifty 50 or SMP 500. So, we see that index fund is essentially a equity fund however, Unlike equity fund where the fund managers determine which portfolio to hold, that is which company shares to buy and which company shares not to buy or sell. Now, in in in index funds, the shares of the companies which are considered to be part of the mutual fund are determined by the Sensex or determined by the index investor based on the mutual fund is based on let's take a look at one example of index fund HDFC index fund at 50 plan. Look at the holding pattern here 100% of the investment is in equities, because it is following the index. Another thing look at the graph which is shown here. Over the last 12 months there has been no change in the allocation of funds across the different sectors.

That is because the index does not composition does not change very frequently. Index composition does change but it takes a very long time before the index composition is change. That's why the allocation of funds across different sectors and allocation of funds across different companies do not change very frequently in index funds. The main advantage of index funds is that these are passively managed by passively managed means that when a index fund is being managed, the fund managers do not have to do it every day research and buy and sell stocks for the fund. That is because the index determines what stocks to be bought and what stocks to be sold. And these do not change where they said very rarely.

So there is no requirement for in what you call planning the investment in these funds by the fund managers. And because there is no active management, the fees on the index fund is very low. So whatever you invest comes back to you as an investor from the index funds. The big advantage is that research has shown that there's only a 2% chance that our managed mutual fund can beat the index fund performance IE funds is invested for eight years. So this is a very big research result. So if a person stays invested in index fund for eight years or more, they, he will definitely make more money than what he can expect from a managed mutual fund.

Look at the graph. It shows the trend of the BSE Sensex Bombay Stock Exchange Sensex over the last five years. Now, from this graph, one can easily see that a person stays invested in index fund for a long period, he or she will definitely make a reasonable amount of profits on his investments. However, investment index funds also have some disadvantages. One of the things is you see in the graph, there is a downturn. Now during downturns, the index fund says they have already Follow the index, they cannot be managed.

If it's a managed fund normally the fund managers would hedge that amount, money at that point of time in some instruments like cash etc. to overcome the disadvantages of the market going down. However index funds this is not going to be possible. Another disadvantage of index fund is that in the index fund the larger companies if they suffer in the marketplace, then the index takes a hit. And this means the index funds also will have a downturn. So, the larger fund larger companies normally have more weight on the index.

And as a result, if they take a hit in the market, then the index funds suffers. Thank you for watching. See you in the next lecture.