Index Funds - The easiest way to invest in stocks

The other day, I got a call from my friend Rashmi. She’s a 27-year old Marketing Manager with an MNC. She has never invested in stocks, but has been observing the stock market recently and is seeing that the market is doing pretty well (Sensex, Nifty etc etc - yeah we’ll get to all of that, don’t worry). So Rashmi wanted to invest in the stock market, but didn’t know how to pick the right company’s share to invest in. She received “tips” from some brokers and friends, but wasn’t sure how genuine they were.

I’m sure most of you can relate with Rashmi. You want to start investing in the stock market, but don’t know how to pick the stock. Or some of you want to take less risk and you don’t want to put your savings in just one company.

If you are either of the two, this 3-minute post is for you. After reading this, you’ll be able to start your journey of investing in the stock market.

So let’s continue with Rashmi’s story. She was observing the Sensex and saw that it was rising exponentially.

Now, what is the Sensex, and what does it mean when it rises? The Sensex (short for Sensitive Index) is nothing but an indicator of the performance of the top 30 companies of the BSE (Bombay Stock Exchange). Let’s quickly go a step deeper. An exchange is a place where stocks (or shares, the words can be used interchangeably) of a company are bought and sold. Think of it as a marketplace for buying and selling company shares. Two individuals or corporations can buy or sell any company shares from/to each other. The two largest exchanges in India are BSE and NSE (National Stock Exchange), and both have their own indicators (called Index) - Sensex and Nifty respectively.

So, coming back. The Sensex represents the movement of stock prices of 30 well-established and financially sound companies that trade on the BSE. And the Nifty represents the movement of stock prices of 50 well-established companies on the NSE. There is a calculation done (the details of which are not relevant to this post) using which a number is arrived at for the Index. So if you read “The Sensex opened 600 points higher at 47,600” - this is an indicator that the 30 companies’ share prices have risen). In simple terms, if, on an average the 30 companies on Sensex are doing well (which means their stock prices are rising at a particular time), the Sensex rises. Same way, if, on an average, the 50 companies of Nifty are doing well (which means the stock price is rising), the Nifty rises.

Being the largest indicators (since they have the most well-established companies), the Sensex and Nifty represent our country’s overall economy. If the economy is doing well, that means that most of the well-established companies are doing well. Which in turn means that the Sensex and Nifty will rise. Same way, if the economy is falling, most of these major companies of India will fall, and so will the Sensex and Nifty.

Now, here’s the fun part. Index Fund.

An Index Fund is a Mutual Fund that replicates, or imitates, an index. So if you buy a Nifty Fund, that fund will invest in all the 50 companies that make up Nifty, in the same proportion. Same way, if you buy a Sensex Fund, that fund will invest in the 30 companies that make up the Sensex, in the same proportion. If you don’t know how a Mutual Fund works, read the article here. A Sensex Mutual Fund will therefore replicate the movement of the Sensex. If the Sensex has risen by 20% in the last 6 months, this Mutual Fund will also give approximately 20% returns for that period. Same way, if the Sensex/Nifty has fallen, the relevant Index Fund will make a loss in the same proportion.

So, if you want to invest in the equity market, the easiest way to do it is to invest in an Index Fund. The fund will simply imitate the relevant index and give you returns. Now, this post just gives you two examples of Sensex and Nifty. But there are a lot of indices in India, which represent different types of companies. You can invest in any such Index Fund. It’s really simple to do, and you don’t need to spend too much time analyzing the fund. All Mutual Fund companies that offer an Index Fund (like Sensex Fund) will have more or less similar returns.

So if you’ve never really invested in equity actively and want to start, start with the Sensex or Nifty Index Fund. Both Sensex and Nifty have given phenomenal returns in the past, and will continue to do so in the long run. In fact, every investor should have Index Funds as a part of their portfolio. Start with a lumpsum or an SIP, whatever is convenient to you. But just START.

If you need more conviction, check out the returns of the Sensex from 1990 till 2021:

The Sensex has increased by 68 TIMES since 1990, giving 14% + returns annually, which is phenomenally phenomenal! So just Rs. 10,000 invested in 1990 in a Sensex Index Fund would have become Rs. 6.8 lakhs today! That’s how awesome a good investment in an Index Fund can be!

Well, that’s about it. Keeping this short (as always) so that you guys don’t get bored. You may write to me at ankurajhaveri[at]gmail[dot]com or contact me on WhatsApp on the links given above in case you have questions.

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