A broad market index fund is a great option to consider if you plan to invest your money for the long term. The associated costs of managing these funds are on the lower spectrum, and you can choose schemes based on your risk tolerance and investment goals.

What are Broad Market Index Funds?

A broad market index fund is a type of mutual fund that replicates the performance of the stock market. They include various investments, like bonds and stocks, that you can purchase in one sale. 

 

Simply put, these funds reflect the movement of an entire market or a certain portion of it. Fund managers disburse the money as per the fund’s guidelines and allow passive management of the investment. They make changes in the fund only in case the larger index undergoes significant changes.

How Do Broad Market Index Funds Work?

Broad market index funds replicate securities of larger markets, usually global securities. To replicate the returns, they track securities listed on various indexes, including the Nasdaq Composite, the Standard Poor’s 500, and more. 

 

When you invest your funds across various industries and sectors, their market exposure increases. Investing in a wide range of sectors and assets in one shot helps lower the associated risks and increase your returns.

Pros of Broad Market Index Funds

Here are the advantages associated with investing in broad market ETFs.

  • Lower Related Costs

The expense ratio of broad market index funds is lower than 0.20%. Fund houses require money to cover the cost of managing the investment. When the expense ratio is on the lower side, you get to earn better returns in the long run. Also, a lower expense ratio translates to better compounding power over time.

  • Portfolio Diversification

Broad market index funds invest in a significant number of securities. When compared to other narrow index funds, these funds help you diversify your portfolio and generate better returns. This, in turn, helps mitigate risks associated with investing. 

  • Low Turnover

One of the primary causes for lower costs and fees of these funds is that they are not replaced or sold at an increased rate. In simple words, these funds have a lower turnover. While other non-index funds can possess a turnover of more than 50%, they have a turnover of less than 5%.

  • Passive Fund Management

Broad market index funds are managed passively. This means that the aim of the fund manager is not to beat the benchmark index. Instead, the fund manager aims to track the performance of the benchmark index. Doing so lowers certain risk parameters associated with the investment.

Cons of Broad Market Index Funds

Here are some disadvantages of investing in broad market index funds.

  • Modest Returns

Broad market index funds are diverse in nature. So, their returns are neutral and, therefore, modest in comparison to the returns provided by sector-focused or other types of narrow mutual funds.

  • Lower Flexibility

For these types of funds, fund managers follow specific guidelines. Hence, these investment options have lower flexibility when compared to other types of funds, such as actively managed mutual funds. 

  • Unable to Beat the Indexes

The returns you earn from broad market index funds are typically lower than the underlying indexes. This is because of their diversified nature. Thus, they perform moderately compared to other types of funds.

Things to Consider Before Investing in Broad Market Index Funds

Check out a few parameters to consider before investing in broad index funds.

  • Investment Duration

These funds are a suitable option if you want to invest for a longer horizon. This is primarily because these funds can experience fluctuations in a shorter timeline. 

 

When you invest for a longer period, the effect of these fluctuations minimises, and you get better returns. So, evaluate whether investing for a longer duration matches your investment goals before you opt for these funds.

  • Risks and Returns

Assess the risks and returns before investing since the returns you get from these funds may not always be at par with the returns of their underlying indexes. A benefit you can note here is that these funds are less volatile since they focus on a particular market index.

 

That said, it is ideal to invest in these funds during a market rally. 

  • Taxation

When you redeem the index fund units, you earn capital gains. Depending on the holding period, you will have to pay tax on such gains. 

 

If you hold the units for 1 year, the returns are classified as Short-term Capital Gains (STCG) and attract a 15% tax. If the holding period is over 1 year, they are considered Long-term Capital Gains (LTCG) and attract a 10% tax without indexation benefits.

Who Should Invest in Broad Market Index Funds?

Broad market index funds are ideal for risk-averse investors looking for a long-term investment avenue. Since they replicate market indexes, they are exposed to lesser volatility and generate predictable returns. They are also a suitable option if you do not prefer continuous management and tracking of the fund.


You can find various mutual fund types and schemes on Bajaj Markets. All you have to do is compare and choose an option that matches your requirements. Get started now to benefit from a simple application process and minimal paperwork.

FAQs on Broad Market Index Funds

How can I invest in broad market index funds?

You can invest in a broad market index fund directly through an index fund provider or via your brokerage account.

How do broad index funds and ETFs differ?

You can purchase or sell shares of ETFs whenever markets are open. On the other hand, you can order broad market index funds anytime, but the purchase of these shares happens only once a day after the market closes.

Is investing in broad market funds safe?

Yes, investing in broad market index funds is safe. They help diversify your portfolio and mitigate risk.

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