According to SEBI, an Index fund is defined as an open-ended scheme that tracks or replicates the market’s index. According to the guidelines stated, the minimum investment in the securities for any particular index that is being tracked or replicated must be 95% of the total assets.
The broad market index fund is also a type of mutual fund that contains investments that help track a large index. In case you are working on your own or with an advisor who suggests you these funds, it is a great option to learn how the funds work and the final achievement.
What are the Broad Market Index Funds?
A broad market index fund is a basket of investments such as bonds and stocks that in turn allow the investor to purchase a few investment types in one particular sale. In these funds, the manager of the funds disburses the invested money according to the fund’s guidelines. These managers help to passively manage the funds and only make changes when there is a change in the larger index in the portfolio.
How do these Broad Market Index Funds work?
In the investment market, the broad market index funds invest in a large segment of the investments. They mostly track securities that are listed on one of the many indexes such as the Standard Poor’s 500, Nasdaq Composite, and the Dow Jones Industrial Average, etc.
Market exposure is a term that is used to describe the amount of money that is invested in a sector. In case the investor has a broad market exposure, this means that they invest in a good amount of sectors. Usually, people invest across a handful of sectors in one single method, that is used to create a diverse fund and hence reduce risks.
Those funds that offer the broadest market exposure to the investors are called the total market index funds. An exchange-traded fund (ETF) or mutual fund that helps track the S&P 500 Index is a broadly diversified indexed fund. Any fund that follows, is not broad enough to be looked at as a broad index fund.
The Broad Indexed Funds invest in a larger index such as the Russell 3000 or Wilshire 5000. The Russell 3000 or Wilshire 5000 include most of the US stocks that are traded on the stock exchange. Because of this wide group of holdings, you will be able to see funds’ names with “total market” added.
One such example is the Vanguard Total Market Index Fund Admiral Shares.
Advantages of the Broad Market Index Funds
Like any other index fund, broad market index funds have the same advantages with few added ones. Some of the primary benefits for the investors are:
Low Expenses: Broad Market Index Funds have an expense ratio lower than 0.20% like most of the other index funds. For every Rs. 10,000 invested, the expense ratio is Rs.20. This low cost helps in boosting the returns in the long run. Low fees equal more money compounding over time.
Broader Diversification: Most of the index funds invest in a large number of securities. These broad market index funds offer greater diversity, signifying that they invest in a large number of securities when compared to the narrower index funds.
Low Turnover: One of the main reasons for the low expense and cost of the index fund is that the holdings are not sold and replaced at a high rate. This is known as “turnover”. Non-index funds or actively managed funds can have a turnover that is higher than 50% but the index funds usually have a turnover that is less than 5%.
Tax Efficiency: Taxes are lowered because of the low turnover that is passed through to the investors. In case when the mutual funds sell holdings at a price that is higher than the price it was purchased, capital gains are made. In the process, capital gains trigger capital gain taxes. Also, extra taxes can be prevented by less turnover that was initially caused by higher turnover.
Disadvantages of the Broad Market Index Funds
Like any other index fund, broad market index funds have many of the same disadvantages:
Modest gains: Because of the diversified nature of these Broad Market Index Funds, they act as the neutral performers when compared to the more narrow and sector-focused funds.
Lack of Flexibility: As the fund managers follow the fund’s guidelines, ending up with less flexibility when compared to an actively managed fund.
Not able to beat the Indexes: Returns from the broad market index funds trail their underlying indexes most of the time.
Conclusion
The broad market index fund is a type of mutual fund that contains investments that help track a large index giving investors a wide market exposure. Like any other investment in the finance market, these funds also carry both pros and cons. Leading pros for the broad market index fund are the lower risks and low expenses for the investors.
When compared to mutual funds or other actively managed funds these broad market index funds are less flexible.
