In one of my earlier posts I mentioned index funds. Here, I am going to dive a little deeper into what they are.
Ok! So there are two platforms through which shares of any company are traded in India. One is the National Stock Exchange, and the other is the Bombay Stock exchange… also affectionately known as NSE and BSE. Think of this as a directory wherein all the companies which are traded publicly (as in you and I can buy a part of the company) are listed.
Phew. Okay. Come let’s enjoy a full-fat, full-cream mocha latte 😀
Now, any share that you buy or sell will have to go through one of these exchanges. The exchange here also does a cool thing. Not only does it list all the companies, it also has its own graph like thing to make you all the more confused.
What does this graph-y thing do?
One important graph or lets call it index is the NIFTY, it stands for National Stock Exchange Fifty. I’m sure you’ve heard of this already. There have been plenty of headlines and random conversations that this would have come up, especially scary things like ‘BLOODBATH on Dalal street as NIFTY crashes by ten-thousand-million points.’
So NIFTY basically tracks the top 50 companies in India. They have some insane calculation called ‘free-float market capitalization methodology’, but essentially, think of it as an indicator of the health of these top 50 companies. It’s a dynamic list and the graph changes every day.
Similar to this one is the SENSEX 30 index, which tracks the top thirty companies listed on the Bombay Stock Exchange.
All right all right all right.
Now we know what an index is… kind of.
What in the world is an index fund?
We needed to go through this step by step process in order to get here people. There are many different types of index funds, but the most important one that you need to know about is the index fund that tracks either the NIFTY or the SENSEX.
So imagine there is a person who looks at the NIFTY and all the listed companies in it, and has a brainwave. ‘Lets create a fund that contains exactly all the companies listed on the NIFTY in exactly the same proportion, essentially mimicking the graph.’ And that’s how an index fund is created.
So when you buy an index fund, you are essentially buying a bucket of different top companies that are doing extremely well in your country.
Cool cool, I’m sold on this. How do I invest in this? I need to do this NOWWW.
So if you’ve read the bit I wrote about mutual funds, you already know that there are actively managed funds by these fund-houses who pick stocks and securities and bundle them as a mutual fund. Now since the index fund is a no-brainer, there is no need for it to be ‘actively managed’, it just follows the NIFTY/SENSEX index. So, that means you’re paying a lot less for the management of this fund.
There are several fund-houses that you can look up and buy the index fund from. Check out Groww.com or Kite by Zerodha from where you can buy these exciting (haha) investments.
Also, groww or Zerodha isn’t paying me to write this, I actually use these, which is why I am recommending them to you. The interface is easy to use and you don’t feel like a lost child trying to navigate a busy market.
Can I make this less jargon-y? Did you all last till here? Let me know! 🙂
The Money Wellness Studio 
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