Picking the stocks to invest in is often the hardest factor of investing for a beginner. While it may seem easy, 100% of your stock market success relies on you selecting the right stocks to invest in. This is because the stocks you pick should have ample growth opportunities. But how do we gauge a stock’s potential? That is a long and strenuous process that involves analysing the stocks thoroughly.
But this may turn out to be a difficult process for a new investor. What helps could be a pre-select stocks list to invest in. Even better could be a fund that constitutes all these stocks.
In reality, index funds give you the same opportunity. Let us learn more about index funds and see why it is a wise choice for new stock investors.
What are stock market indexes?
A stock market index is a tracker that consists of the top stocks in the stock market or a particular sector. It is used to gauge the overall performance of the market or sector.
For instance, an index that tracks the IT companies in India will have the top IT companies by market price in its composition. Stock market indexes also track the stock market in general. There are two such indexes in India – The nifty and Sensex. These indexes have the top companies in India. Hence, its movements are often indicative of how the stock market is performing in general. For instance, if the Nifty or Sensex is rising, it is often viewed as a general market uptrend and vice versa.
How is investing in stock market indexes beginner friendly?
Stock market indexes are a good entry point for beginners in the stock market. Of course, this, too, requires research and knowledge, but it tends to demand less. For instance, if a beginner wants to invest in the stock market’s growth, they could invest in the Nifty or Sensex. If they want to invest in a sector’s growth, they could invest in an index that follows a sector. For example, if you want to invest in the IT sector, you could invest in Nifty index, an index that tracks the performance of top companies in the sector.
How to invest in an index?
Now that it is clear how beneficial investing in an index can be let us look at how you can do the same. The default option is to look to invest in every stock of the index you want to follow. In other words, manually creating a portfolio with the index’s composition. While this option is possible, the challenges are many. Firstly, you will need a large amount to invest and second, managing the portfolio on your own can be a daunting task
Here, what helps is a fund. An index mutual fund is a wise choice here
What is an index mutual fund?
An index mutual fund invests in a portfolio that is similar to that of an index. For instance, if the index is following the Nifty FMCG index, the index fund will also have the same composition as that of the fund. This helps you invest directly in the composition of the fund without many hassles.
This has many advantages. The biggest of which is that you don’t have to actively monitor your portfolio, and instead, an experienced fund manager will do the same for you.
Some index funds will also have minor debt elements, this decreases the risk associated with investing in them. In short, index funds are a good option for beginners to invest in the stock market. Ensure you select a fund according to your investment horizon for the best results.