Is investing in Index funds always a better choice compared to investing in Individual stocks?
"The Best of Both Worlds: Index Funds and Individual Stocks"
The data, collected by S&P Global Market Intelligence, revealed that fewer than 10 percent of active fund managers were able to beat their benchmarks over the two decades. This suggests that when it comes to stock investing, it may be more beneficial to put your money in a low-cost index fund rather than choosing an actively managed fund.
Investing in index funds versus individual stocks can be a debatable topic in the Indian stock market. While investing in index funds provides a more diversified portfolio and reduces the risk of losing money due to a single stock's performance, investing in individual stocks can offer higher returns if one selects the right stocks.
But the issue is at one point in the time, Yes bank and DHFL were considered as very good quality stocks and were part of Nifty 50 but what happened with both, all of us know well. On the other hand, a stock like HDFC bank has given extraordinary returns as compared to any index fund.
It is important to note that investing in individual stocks carries more risk as compared to index funds.
An Individual stock can fall or rise drastically but an Index fund can’t, as its the average of top-listed stocks.
Peace of Mind with Index Funds: Having an Index fund in your portfolio can provide peace of mind as you don't have to monitor market fluctuations and sector corrections daily. You also don't have to check your returns on a quarterly basis. If a company like Yes Bank is not performing well, it will automatically be replaced by another stock in the Nifty Index, ensuring that you always remain invested in the top 51 stocks.
Detailed Analysis:
Only 13 out of the 50 stocks in the Nifty Index have been a part of the index since its inception. These include HDFC Bank, RIL, HDFC, ITC, HUL, L&T, SBI, Tata Motors, Dr. Reddy's Labs, Tata Steel, Grasim, Hero, and Hindalco.
Only 6 companies have managed to retain their place in the 30-share index, while the rest have been shuffled based on their performance. These companies are Reliance Industries, Hindustan Unilever, Nestle, ITC, Mahindra & Mahindra, and Larsen and Toubro.
Picking the right stocks and investing regularly can be a challenge even for professional fund managers, as evidenced by the fact that only 15% of them succeed.
The Nifty 50 Index Fund has been a popular investment option among Indian investors, with a historical return of around 12% p.a. since its inception.
For traders who trade by pledging their underlying assets, an index fund may be a more suitable option. Exchanges calculate the pledged margin of any security daily, and if the price of the underlying asset suddenly falls, your pledged margin will also decrease.
Let's take one example: you have 1000 shares of SBI and assume the current market price of SBI is 500. So, if you want to trade in futures and options by pledging that margin, you will get close to 80% margin. You can then trade with a margin of 4 lakh rupees (500 * 1000 * 80%).
However, if the price of SBI suddenly drops by 20% to 400, then your pledged margin will also decrease accordingly. Now, you can only trade with a margin of 3.2 lakhs (400 * 1000 * 80%).
But if you have an index fund, you won't face issues like the one we discussed above, as the volatility of an index is much lower than the volatility of individual stocks.
In conclusion, investing in index funds can be a great way to diversify your portfolio and reduce the risk of losing money due to a single stock's performance. Compared to individual stocks, index funds offer a more stable and reliable return. For traders who trade by pledging their underlying assets, index funds are a more suitable option than individual stocks as they have lower volatility. Ultimately, the decision of whether to invest in index funds or individual stocks should be made based on the investor's risk tolerance and investment goals.