Equal weight to debt: What to know about different types of index funds

Their costs and expense ratios are typically lower compared to actively managed funds

Index funds in mutual funds aim to replicate the performance of a specific benchmark index, such as the NSE Nifty or Sensex. Index funds hold shares in the exact same proportion as the index being replicated. These funds’ costs and expense ratios are typically lower compared to actively managed funds.

Here are different types of index funds:

Broad market index funds

Broad market index funds seek to replicate the performance of a broad stock market index by providing exposure across various sectors. For instance, the SBI Nifty Index Fund tracks the Nifty 50 index spanning diverse industries. Investing in such index funds allows investors to gain exposure to the overall market performance.

Equal weight index funds

These allocate an equal weight to all index components to ease the risk of over-concentration in a few largecap stocks. The goal of equal-weight index funds is to provide more balanced exposure across all index components.

Market capitalisation index funds

These funds weigh holdings depending on the underlying firms' market capitalisation, which is calculated by multiplying a company's share price with its total outstanding shares.

Factor-based or smart beta index funds

Factor-based or smart beta index funds track an index based on specific factors or investment strategies. Unlike traditional market capitalisation-weighted indexes, these funds aim to capture certain characteristics such as value, growth, low volatility, quality, or momentum. Factor-based indexes avoid the conventional approach of weighting securities solely by market capitalisation.

Strategy index fund

Strategy index funds follow predefined strategies, such as low volatility or high dividend yield. These funds seek to provide investors with exposure to a specific investment topic or sector, allowing them to capitalise on market trends.

Sector index funds

These funds enable investors to direct their investments towards particular industries such as technology or healthcare. They provide a way to capitalise on the potential growth of particular sectors.

International index funds

These investment products track the performance of indexes comprising stocks, bonds, or other securities issued by companies or governments in other countries.

Custom index funds

Custom index funds, also known as bespoke index funds, are designed to fulfill the specific investment objectives or needs of major institutional investors or clients. These funds aim to replicate a customised index that reflects the preferred portfolio characteristics or investment strategy of the client.

Debt index funds

These follow fixed-income indices that offer exposure to bonds and other debt securities. Debt index funds expose investors to a diverse range of fixed-income securities, such as government bonds, corporate bonds, municipal bonds, and other debt instruments.