Learn About The Different Types Of Index Funds

By | April 11, 2022

One of the easiest ways to invest in the stock market is to invest through an index fund. Different index funds vary Than imitating the index. So their returns are the same as the returns of the index they are imitating. Different to form an index Methods are adopted. The form of the index varies depending on how much weight is given to the stock in the index.

Weight By Spirit:

Price Waiting Index (Weight by Price) This is one of the easiest ways to form an index. In a price-based weighting index, the price of each stock is divided by the sum of the prices of all the shares in the index. Suppose we want to create an index consisting of only three stocks, Reliance Industries, HDFC Bank and TCS. The stocks are priced at Rs 2,05, Rs 1,205 and Rs 2,8 respectively. If we create an index by taking one share of each company, the index becomes as follows:

A simple example of a price weighting index is shown here. A big challenge arises when a stock splits out of the stocks included in this index. The stock that splits becomes necessary to change the weight of the stock in the index. In this case the structure of the index has to be changed without any meaningful reason. The Dow Jones Industrial Average and the Nikkei 3 are such indices.

Weight By Market Cap (Market Cap Weighting) :

The size of listed companies is determined on the basis of market capitalization i.e. the market value of the stock. The price of a stock is determined by the overall mood of the stock in the market. The weight of a stock in an index based on market cap weighting is determined by its market cap. The total market cap of all the stocks in the index is weighed when the price of a stock is multiplied by the sum of the number of shares in its market. Such an index is generally considered a liquidity-based index, as stocks with the highest market cap have higher liquidity. Index funds are the most prevalent following such an index.

Weight Based On Free Float Adjusted Market Capitalization :

Trading is not possible for the general public even if every stock included in the Free Float Adjusted Market Capitalization Weighting Index is listed on the market. Adjustments are made with so many shares. Non-traded shares may be held by government, affiliated companies, founders and employees. In addition, free float shares have to be adjusted due to foreign-owned shares. Such an adjustment gives investors information about the liquidity of the stock, which is the number of shares placed in the market. Not seen. S&P BSE Sensex The free float adjusted market cap is an example of a weighted index.

Equal Weight :

No single stock gets too much weight in an index with the same weight as each stock in the index. In one of the above examples we discussed Reliance Industries, HDFC Bank: and TCS are the three stocks that index. The example was a price-based weight index and the price of each stock was taken into account to form the index. Another way to form an index is to determine the weight of the three stocks according to the accompanying table.

We have allocated Rs. In the US, the Barons 500 index weighs 0.5 per cent for each of the 500 stocks. All these stocks together weigh 100%. This type of index may require frequent buy-sell transactions to balance the portfolio. This increases the cost of managing the fund. In addition, there are a number of strategies for constructing complex indexes, each with its advantages and disadvantages.

Question : If a switch is made from one mutual fund to another, is it tax free?

Answer : Mutual fund switch transactions are not always tax free. However, it is not always taxable. In fact, there are two stages to the operation of a switch. In one, redemption is done from one scheme and then investment is made in another scheme. Therefore, if there is a profit at the time of redemption, it is considered as capital gain. The question of taxability does not arise if there is a loss. As of today, if certain types of mutual fund units are redeemed, the securities transaction tax is levied and if the profit is made, the long term Short Term Capital Gains Tax is applicable. This Capital Gains Tax is applicable to each scheme category at different rates.

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