I'm 30 and a novice investor. Want to know if investing in index funds is the key to long-term financial success?

I am 30 years old and have recently started investing in Mutual funds. Can you explain how investing in index funds benefits me as an investor? What makes them a good option for long-term investment goals? 

Name withheld 

-Reply by Saurabh Gandhi, Senior Product Manager, Upstox 

Index investing is gaining traction, this is evident from the fact that funds tracking Nifty indices have seen 53% CAGR growth in 10 years, according to NSE. Index investing is gaining popularity because of the benefits it brings to the table for long-term investors. 

Low costs: To start with, index funds carry a low fee compared to active funds. The idea with Index funds is to mimic their underlying benchmark; hence, there is no need for an efficient team of research analysts, etc, to manage the funds. As there is no intention or need to actively trade in the markets, it leads to lower costs for managing funds.  

No investment bias: As index investing follows a defined mandate in the sense that what to buy and how much to buy (allocation) is already known, the process can be automated in a regulation-based investment method. This means that there is no investment bias and eliminates human discretion or bias in the whole investment process.  

Diversification: Adequate diversification in index investing ensures exposure to the broad market, which means your money is spread across different sectors. If you take the example of Nifty, your money is invested in at least 13 different sectors. In the long run, diversification matters and helps build wealth with minimum risks. 

Low turnover: Index investing, also known as passive investing, needs minimal portfolio shuffle, and hence, the portfolio turnover is low. With fewer trades happening, there is tax efficiency in the Index funds, which gets passed on to the investors. 

Investors have various options when considering index investments. They can choose from large-cap indexes like Nifty 50 and Nifty Next 50, mid-cap indexes such as Nifty 150, and small-cap indexes like Nifty 250 Smallcap. Additionally, there are funds that mirror international indices like the Nasdaq 100 and Dow.  

By strategically combining these index funds, investors can construct a diversified portfolio. With the Indian economy and market on a growth trend, investors, especially new entrants, can start with an SIP in index funds. This is because index funds derive their value from overall market growth represented by key indices like Nifty and Bank Nifty.  

However, to secure long-term financial success, diversify investments rather than rely on a single option. You must prioritise financial planning and align your investments with specific goals to build a robust financial portfolio for sustainable growth.