I am a big fan of investing in index based funds. There are some reasons for this:1.It is very difficult for a fund manager to outperform the market on a consistent basis (hence the mandatory disclosure that past performance is not indicative of future performance). With an index fund, all the manager has to do is invest in the index stocks in same ratio and let the market do the rest.
2.Investment is restricted to the stocks in the market index. The fund manager cannot invest anywhere else. For an investor, there is this comfort of knowing that investments will be made in known companies. In contrast, traditional funds invest in a variety of stocks (midcaps, specific sectors, emerging stocks etc). Quite often, some stocks don't move or later turn out to be non-investment grade.
3.Management fees for a traditional mutual fund are far higher than that of an index fund (passive management is always easier than active management and does not call for any intelligence).
4.Almost all index based funds are now traded as ETF (exchange traded fund)... this means you can buy and sell it in market hours and get current rate (mutual fund investment is on NAV basis which changes once a day).
Strategy:
The SIP route is the best as it eliminates the hassles of attempting to time the market and also takes care of money management.
Decide on a fixed sum say Rs.5000/- per month and start investing for min 2-3 years. We are at 5500 levels and off 10% from the peak. Any correction will be limited to 4400-4500 so you will buy more units on declines (as investment amount is fixed). If there is no correction and markets blast off from current levels you are still investing near the lows.
More info at the NSE website
