Invest in ETFs and index funds

K. ARAVIND

Retail investors generally complain that even when the stock market rises, they do not benefit from the shares they have invested in. This is because such investors are not the only ones holding shares that boost the stock indices Nifty and Sensex.

The situation is such that even a section of mutual funds is not able to break the stock indices Nifty and Sensex. The Nifty and the Sensex are surging based on the rise of 10 or 15 stocks with the highest weightage. This situation is likely to continue. So the reality is that investors who own shares outside of these are currently unable to make a profit.

Shares of leading companies are driving the market. Over the past five years, the Nifty and the Sensex have been driven by the top 10 or 15 largest companies in terms of profitability.

A repeat of this situation will be seen in the market in the coming months. Brokerages and analysts are “upgrading” companies, both indexed and non-indexed, whose per capita earnings are significantly higher, paving the way for more investment in such stocks.

Investment guru Warren Buffett gave advice to investors at the annual general body meeting of his company, Berkshire Hathaway. The advice was to invest in index-class funds to get the best returns. Warren Buffett gave the advice, citing the returns of an index fund based on the S&P 500, an index of the US stock market. This advice can be applied here as well in the present situation.

Index funds and Exchange Traded Funds (ETFs) are ideal investment products for those who want to gain by sticking to the stock index. Index funds and exchange traded funds invest in stocks that are included in the indices. There are some differences between ETFs and Index Class funds. While Indian index funds focus on investing in stocks in the index, the weightage of shares in the fund’s portfolio may not be equivalent to that of the index. The position of the fund manager can also influence the determination of weightage. At the same time, ETFs give an equivalent return to the indices. It is advisable to opt for a Systematic Investment Plan (SIP) to invest in such funds.