What is Broad Market Index Fund

A broad market index fund is a type of mutual fund that aims to replicate the performance of a large stock market index. Broad market index funds can be a good investment option for long-term investors. They can also be less risky and have lower expenses than other funds.
EXPLORE FUNDS
What are Broad Market Index Mutual Funds
EXPLORE FUNDS
3 mins read
23-November-2024

Among the different types of equity mutual funds in India, broad market index funds are some of the most popular options. They offer several advantages and are often more cost-effective compared to traditional funds. In this article, we are going to explore the meaning of broad market index funds, how they work and their various advantages and disadvantages.

What is a broad market index?

A broad market index is a collection of different stocks that represent a large section of a financial market. One example of such an index is the Nifty 50, which is a compilation of the top 50 listed stocks on the National Stock Exchange (NSE).

What are broad market index funds?

A broad market index fund is a type of mutual fund that invests in the same set of stocks as that of a broad market index. The primary objective of the fund is to track and replicate the performance of its benchmark index.

How do these broad market index funds work?

Understanding how broad market index funds work can help you decide whether they are the right investment option for you.

Let us assume that an Asset Management Company (AMC) plans to launch a broad market index fund with the Nifty 50 as the benchmark. Now, for the fund to be a broad market index fund, it must invest in the same 50 stocks as the benchmark index — with the same sector-wise and individual weightage.

Since both the benchmark index and the fund have the same constituents in the same proportion and weightage, their performance will also be similar. For example, if the Nifty 50 index rises, the NAV of the broad market index will also rise proportionately and vice versa.

Meanwhile, if there is any change in the constituents or the weightage of the individual stocks in the Nifty 50 index, the fund managers of the broad market index fund will make the necessary adjustments immediately. This ensures that the fund always accurately tracks the performance of its benchmark index.

Advantages of broad market index funds

Broad market index funds offer plenty of benefits over regular mutual funds. Let us explore a few of them in detail.

  • Better diversification
    Since broad market indices consist of stocks from many sectors, funds that are based on these indices are generally better diversified than regular mutual funds. Such high levels of diversification could potentially decrease investment risk and protect the portfolio from the negative impact of adverse market movements.
  • Low costs
    All broad market index funds are passively managed, meaning that they follow a predetermined investment strategy with little to no interference from the fund managers. Since the involvement of fund managers is very minimal, the funds have very low expense ratios compared to actively managed mutual funds. This cost efficiency can help enhance the return on your investment in the long run.
  • Low portfolio churn
    Unlike actively managed mutual funds, fund managers do not make any changes to the portfolios of broad market index funds. The only time any change is made to the fund is if there is any variation or change in the constituents or weightage of individual stocks in its benchmark index.

Disadvantages of broad market index funds

As with any market-linked investment option, broad market index funds also have their fair share of disadvantages. Here is a quick overview of some of the key drawbacks.

  • Moderate gains
    Broad market index funds are designed with the sole objective of replicating the returns of their benchmark index. The funds are incapable of delivering market-beating returns like regular mutual funds.
  • No flexibility
    Since broad market index funds follow a predefined investment strategy aimed at replicating the performance of their benchmark indices, fund managers have little to no flexibility or freedom to navigate the various market conditions.
  • Tracking error
    Despite the best efforts of fund managers, broad market index funds may not be able to replicate the returns of their benchmark index. The difference between the returns of the index fund and its benchmark over a specified period is known as the tracking error. The reason for such a discrepancy could be due to various factors like trading costs, management fees and portfolio rebalancing, among others. The lower the tracking error, the better the fund is likely to be.

Also read: Different Types of Investments

Conclusion

Broad market index funds offer a straightforward and cost-effective way to invest in the stock market. By investing in such funds, you get diversified exposure to almost all of the major market sectors.

However, if you are planning to invest in a broad market index fund, it is advisable to thoroughly assess various factors like the expense ratio and tracking error of the fund. You can also compare multiple funds with one another to ensure that you choose the one that is right for you.

Essential tools for all mutual fund investors

Mutual Fund Calculator

Lumpsum Investment Calculator

 Step Up SIP Calculator SIP Investment Calculator

SBI SIP Calculator

Groww SIP Calculator

 Axis Bank SIP Calculator

ICICI SIP Calculator

LIC SIP Calculator

Nippon India SIP Calculator

Kotak Bank SIP Calculator

HDFC SIP Calculator

Frequently asked questions

How do broad market index funds differ from regular mutual funds?

The portfolio of broad market index funds is based on its benchmark index. The portfolio of regular mutual funds, meanwhile, is decided by professional fund managers. Furthermore, broad market index funds are all passively managed, whereas regular mutual funds are mostly actively managed.

Are broad market index funds suitable for long-term investing?

Yes, since they provide diversified exposure to a wide range of stocks across different sectors and market capitalisations, investing in broad market index funds may be ideal for the long term.

What are some factors investors should consider before investing in a broad market index fund?

The benchmark index that is being tracked, the expense ratio and the performance history are some of the factors investors must consider when investing in a broad market index fund.

Related videos

Bajaj Finserv app for all your financial needs and goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-approved limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on Easy EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more

GET THE APP

Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.


Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.