Groww Digest

6 Day Course

Theme: index fund investing

Nov 14 to Nov 20, 2022

6 Day Course is a part of our newsletter

series, Groww Digest - all things personal
finance.

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Day 1: Monday
6 Day Course | Theme: index fund investing

Index fund investing is catching on with

investors in India. In this week’s course we'll
explore index fund investing.

Index funds usually track an index.

For example, take the index Sensex. It is made

up of the 30 largest companies’ stocks in
India.

An index fund investing in Sensex would

invest in the stocks that are a part of Sensex
— maintaining the weightage too.

Right now, Reliance is the biggest stock in

Sensex so a Sensex index fund would invest
most in Reliance. Then it would invest the
most in the 2nd biggest company in Sensex
and so on.

It would mirror the weightage of the index.

This is why they are called index funds.

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Day 2: Tuesday
6 Day Course | Theme: index fund investing

One important metric to track in the case of

index funds is the expense ratio.

The expense ratio is the fees charged by the

fund.

In the case of mutual funds, a higher expense

ratio is okay as long as the mutual fund is
giving higher than index returns.

But, in the case of index funds, the fund is

only going to give returns similar to that of the
index. So a higher expense ratio does not
make sense.

Hence, always look for index funds that have a

low expense ratio.

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Day 3: Wednesday
6 Day Course | Theme: index fund investing

Another important metric to keep your eyes

on is the tracking error.

Index funds are not always able to give the

same returns as an index. Many index funds
give returns that are slightly lower than the
index.

This is called tracking error.

This can arise because of multiple reasons:

high expense ratio, withdrawal pressure from
investors, problems buying and selling stocks
in the index, etc.

Investors should aim to invest in index funds

that have the lowest tracking error.

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Day 4: Thursday
6 Day Course | Theme: index fund investing

Taxation.

For all tax purposes, index funds are taxed exactly

like any equity mutual fund.

This means, if you invest and withdraw from an

index fund within a year, you will have to pay a 15%
tax on the gains (profit) part.

If you invest and withdraw from an index fund after

a year, you will have to pay a 10% tax on the gains.

If you made no gains or profit, you will not have to

pay any tax.

But even if not paying any tax, you still have to file
the returns — so make sure to do that.

Do remember, tax is paid only when withdrawing.

So, if you invest in 2022, and withdraw in 2028, you

will pay a tax in 2028 — not every year between
2022 and 2028.

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Day 5: Friday
6 Day Course | Theme: index fund investing

Index funds are passive in nature — which means,

there is no fund manager who decides which stocks
or assets to buy or sell.

The decision is based simply on the index being

tracked. It is done automatically.

In many western countries, index funds have

become very popular. This is because many mutual
funds have failed to give better returns than index
funds.

In India, index funds are not as popular yet.

This is because many mutual funds are actually

performing better than index funds over the long
term.

Some people believe this will change in the future.

Investors must remember, not all index funds are

the same.

Just like mutual funds, there are index funds that

carry different levels of risk and have given
different levels of returns.

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Day 6: Sunday
6 Day Course | Theme: index fund investing

We’ve reached the end of this week’s course

that started on Monday.

Here’s a test you should take. Get pen and

paper!

Question 1:
In which stocks would a Sensex index fund
invest in?

-10 biggest stocks

-20 biggest stocks
-30 biggest stocks

Question 2:
In case of index funds:

-Lower expense ratio is better

-Higher expense ratio is better

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Day 6: Sunday
6 Day Course | Theme: index fund investing

Question 3:
Investors should aim to invest in index funds
that have the lowest tracking error.

-True
-False

Question 4:
For all tax purposes, index funds are taxed
exactly like any equity mutual fund.

-True
-False

Question 5:
In index funds, a fund manager decides which
stocks or assets to buy or sell.

-True
-False

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Day 6: Sunday
6 Day Course | Theme: index fund investing

Answers:

Q1: 30 biggest stocks;

Q2: Lower expense ratio is better;
Q3: True;
Q4: True;
Q5: False.

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 That’s it for this week!

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See you next week!

—Groww Digest Team

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