How to find safe Index Funds to invest in India?

Recently one of my clients asked the question “How to find safe Index Funds to invest in India?”. Let us explore to find the answer to this question.

Such questions are common mainly because nowadays Index Funds are gaining popularity among Indians. Low cost, simple to choose, and if you are not relying on fund managers’ skill (many times LUCK), then Index Funds are obviously your best choice to invest.

How to find safe Index Funds to invest in India?

The first thing you have to answer before you look for answers to such questions is what you mean by SAFE. When you are investing in the equity asset class, obviously it is a volatile asset class. Hence, I am unable to understand what you mean by SAFE.

Just because Index Funds are gaining popularity among Indians does not mean you have to jump the bus to follow the herd. Try to understand what are Index Funds at first and why you need Index Funds. Hence, the below-listed points may help you to get an answer to the question of “How to choose safe Index Funds to invest in India?”.

# Have a clarity

You must have clarity of why you have opted for equity asset class at first. Simply because your friends or relatives are investing in equity or investing in index funds does not mean you too must jump in. Hence, the purpose must be clear for you by analyzing your own financial life rather than trying to replicate your friends or relatives’ financial lives.

# Asset Allocation

Never trust a single asset class (especially if your goal is long-term) as we don’t know in future which asset class will perform better. Don’t believe in any future predictions also. Forget about humans, even God doesn’t know the future performance of a particular asset class. In such a situation, the best strategy is to have a proper asset allocation based on time horizon and your risk appetite rather than have a love affair with a single asset class.

Do remember that equity investors in India are just around less than 10%. It does not mean the remaining 90% are financially illiterate or poor. The remaining 90% may be found in some other routes to create wealth. Hence, just because the so-called modern financial gurus, social media, or financial industry is abuzz with equity does not mean you too have to invest BLINDLY.

Having a proper asset allocation and sticking to it is the first step in investing. If you can’t understand this step on your own, then learn or hire any conflict-free fee-only financial planner (I am also offering this service).

# Need for equity

Once you have done the asset allocation exercise, if you feel equity is a need for you (not WANT because of all are investing), then think of what mode you have to choose to enter the equity market. There are various ways to enter into equity market and all of them have their own pros and cons. Choose the one that is comfortable for you and must not create sleepless nights for you. You can choose direct stocks, PMS, Smallcase, or Equity Mutual Funds (Active or Passive). I have a huge concern about PMS and Smallcase because of their hefty charges, taxation, and prolonged underperformance to the benchmark. Hence, if possible avoid such routes. Regarding direct equity, it requires a different skill, expertise, time, and dedication. If you have all these skills, then explore. Otherwise, the best way is through equity mutual funds.

# Need for Index Funds

Those who are looking for the answer to the question of “How to find safe Index Funds to invest in India?” know the difference between active vs. passive (or Index Funds) difference. Hence, I will not dwell too much on that. Rather than that, once your choice is shortened to Index Funds by neglecting the active funds, then the next search is SAFE Index Funds to invest in India.

Whether SAFE Index Funds exist in the equity market?

The answer is NO. Equity is a volatile asset class. You are looking for Index Funds just to avoid the fund managers’ risk or fund managers’ underperformance risk. By adopting Index Funds, you are just eliminating this risk. However, the rest all the risks of equity or equity mutual funds will continue as usual.

• Market risk will continue as your Index funds have to invest in the equity market. However, volatility or risk nature changes like large-cap, mid-cap, small-cap, or sector-specific. But you can’t avoid the market risk.
• Remember that Index Funds are also types of mutual funds. Hence, few AMCs may play a game like altering with expense ratio (initially may offer the fund at less expense ratio and then may increase without any valid reason) and continue as usual. Hence, be cautious.
• Just because many preach that Index Funds are BEST does not mean you need all the indices that are available in the market. Remember that currently, NSE itself offers more than 350 indices!! Yes, you are hearing it right. NSE offers more than 350 indices as of July 2023. Accordingly, mutual funds may soon offer you all those 350+ Index Funds. Among these, choosing 1-5 funds for your investment is your BIG TASK.
• Finally, having a passive mindset is the most important trait of index investors. No matter which period you consider, there may be few active funds that are outperforming the index (not consistently). Hence, the probability of you changing or shifting to active funds is very HIGH. The simplest task is to choose Index Funds but the toughest task is to stick to the fund or strategy. It requires a lot of confidence in what you believe and it requires a lot of patience. If you lack these two, then investing in index funds is of no use.

Conclusion – There are NO “safe Index Funds to invest in India”. Never believe that the safety and equity markets go together. Equity is a volatile asset class and Index funds just remove the risk of fund managers. Rest all the risks continue as usual. Hence, never search for safe index funds. Such funds do NOT exist not only in India but on this earth!!