An ‘index’ is a grouping of stocks, based on factors like the market cap of those stocks or the sector they are a part of, such as IT, pharmaceuticals or banking. An ‘index fund’ is a mutual fund that only invests in stocks listed in a specific index, and in a similar proportion to those stocks’ representation in that index. In an ideal case, therefore, these funds deliver returns similar to the index as a whole. These funds are also often known as ‘passive funds’, because they do not require active management by fund managers.
In active funds, managers aim to generate higher returns than the category benchmark. However, with the re-categorisation of mutual funds schemes in 2018 by market regulator Sebi, stricter asset allocation limits have been imposed on mutual funds, which means that generating higher returns through riskier stocks has become even tougher for active-fund managers.
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February 03, 2020