People who have retired or are approaching retirement generally invest in safe avenues that guarantee returns. However, fixed-income instruments might not be able to beat inflation. So, if you are retired or nearing retirement and planning your retirement portfolio consider a particular portion of the portfolio in equities for growth according to your risk appetite. Although a volatile asset class, Index Funds have the potential to beat inflation. For example, the S&P BSE Sensex delivered 12.77 percent annual returns in 10 years, as per the S&P Global website. In contrast, fixed deposits would have returned around 8-9 percent yearly.

Index funds can be a stepping stone into the stock market for newcomers, as directly foraying into stocks could be fraught with risks. It is because they may have inadequate knowledge about the market. Index funds follow the benchmark indexes for allocation and performance, unlike the actively managed funds where the fund manager filters out the non-performing stocks or makes investment decisions. In short, index funds mirror the benchmark index as a standard.

How Does Index Fund Work? 

Index funds invest in stocks listed in a particular index. For example, if the benchmark index is BSE Sensex, the fund will invest in all 30 Sensex-listed companies. So, index funds that mirror the Sensex, Nifty 50, Nifty 500, etc., will be helpful for those unfamiliar with the market.

Benefits and Risks:

As these are passively managed, the risk of losses due to fund manager-related issues or investment decisions will also be less than in an actively managed fund. Besides, index funds offer better diversification than investing in individual stocks.

However, index funds are not completely risk-free. As they track the market index, index funds will go up or down depending on the market performance.

These funds are good in the long term. Their returns depend on the index performance. For example, Sensex index funds may be less volatile than the NIFTY Midcap 150 Total Return Index, NIFTY Bank Total Return Index, NIFTY IT Total Return Index, etc., where index funds invest in specific sectors. So, index funds are good for those like senior citizens who do not want to take high risk.