Index funds provide diversification and low costs by tracking a market index. To choose the best index funds, experts recommend three key strategies:
- Align with Risk Tolerance: Choose funds based on your risk appetite. For lower risk, consider large-cap or flexi-cap indices, bullion indices, or broad thematic funds. For higher risk, explore narrower thematic or mid-and small-cap focused funds.
- Minimize Tracking Errors and Expenses: Select funds with low tracking differences, minimal tracking errors, and low expense ratios to ensure better performance relative to the index.
- Consider Fund Size (AUM): Opt for funds with higher assets under management (AUM) to reduce the impact of daily investor activities on the fund’s performance.
These principles help enhance investment outcomes by providing diversification, managing risk, and reducing costs.
