The 7 Simple Steps to Invest in Index Funds
You have taken a decision to invest in index funds.
What do you do next?
Here are 7 simple steps to start investing in index funds:
1) Decide which index you want to take an exposure to
Let's say you want to invest in the Nifty 50 in India.
This is an index that tracks the top 50 companies in India by market value.
By investing in an index fund that tracks the Nifty, you have decided to take an exposure to the top 50 companies in India.
Select your index and know what exposure that index will give you.
2) Shortlist the top 5 fund houses in your country
Find the list of all asset management companies in your market.
Filter them by 'assets under management'.
Look at the top 5.
Chances are, all of these 5 fund houses, have an index fund that tracks the index you want to invest in.
Select one fund from each house.
3) Decide on the exact amount you want to invest
You are going to invest either weekly or monthly.
What is the amount that you are going to invest regularly?
The money that is going into these funds, should not be the money that you might need within the next 5 years.
Once it goes into the fund, you are not touching it atleast for the next 5 years, if not more.
You need to give it some time to grow.
4) Setup the automatic regular payments with your selected asset management companies
You don't want to be doing this manually.
Select any platform you like, that allows you to make these investments.
A quick google search will get you the best platform you need to sign up with.
Divide your monthly amount by 5 and put one-fifth of your total monthly amount into each of these 5 funds.
Just be aware that these 5 funds are investing in the same set of companies.
We are spreading it into 5 fund houses, because we don’t want to keep all of our money with a single asset management company.
Asset management companies are highly regulated entities.
So that way you are safe.
But why to take even that extra risk.
Invest via 5 different funds in the same index.
There is nothing wrong in doing that.
5) Fund the account from which the money will go into these funds
All you have to do is to ensure that your bank account is adequately funded to honor the payments that you have setup.
That should be easy.
Its ok even if this is your salary account.
Nobody is going to pull out extra money from your account unnecessarily.
All your standing instructions are in place, and nobody can violate it.
6) Monitor your portfolio once every quarter
If you find yourself checking your portfolio every other day, you are not an investor.
This is a long term game.
There is no point checking it every now and then.
You will be wasting your time.
The purpose of monitoring the funds is not to make a decision whether to keep the money or pull it out.
The purpose is simply to check if all the payments are going in smoothly and there is nothing wrong with the platform through which you are investing.
7) Do nothing
This is a very important step.
Here is where every investor fails.
They try to time the market.
That is a waste of time.
Just sit back, relax, and watch the market go up and down.
When markets go down, you will get more units of the fund.
When markets go up, you will get less units of the fund.
Either way, you should be fine and satisfied.
This is not a game of activity.
It’s a game of inactivity.
That’s how you win, over the long term.
Psychology plays a very important role in investing, than technique or strategy.
Index funds are destined to beat actively managed funds over very long periods of time.
This is partly due to the fact that these are low cost funds.
The fees are very less since it is a passively managed fund.
It’s like a machine.
Nobody actively manages this fund.
It just remains invested in the index companies in the same proportion as they are in the index.
So there is zero human error involved.
If the index goes up 15% in a year, your money will also go up 15% in that year, adjusting for some minuscule tracking error.
Follow these simple steps
This is no rocket science.
Anybody can do it.
This is probably the best investment you can ever make in your life, especially if you come from a non-finance background.
The trick is to do nothing and simply ride the market.
Rohit Musale, CFA
22 December 2022