What is an Index Mutual Funds? How it Works and Examples

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Index mutual funds are mutual funds that are managed to get the same investment returns as possible with the performance of the underlying index. The reference is a stock index or bond. The most common stock indices for investment managers are used as a reference for index mutual fund products (Rd Index) including Idx30, Lq45, and Sri-Kehati. To achieve this, the investment manager will allocate his investment portfolio to the stocks contained in his reference.

Unlike other types where investment managers actively manage their investment portfolios, this product uses passive investment tactics (Passive management strategy). This product offers a wider market with lower operational costs. Simply put, investment managers do not need to do a lot of company analysis in managing this product.

What is an Index Mutual Fund? How it Works and Examples

Investment managers also do not carry out stock buying and selling activities to beautify investment portfolios, or other elements in the active management of index mutual funds. Instead of trading, the investment manager will make the portfolio resemble his benchmark.

What are Index Mutual Funds?

Index mutual funds are a form of mutual funds whose management is carried out to obtain investment returns by using exclusive indices as a reference, for example bond or stock indices. This mutual fund model is the same as that of open-ended mutual funds, where buying and selling can be worked on at any time on the exchange. Index mutual funds are suitable for investors who want to be clear about the transparency of their investment.

The benefits, risks, how to buy, and also the obligations are similar to mutual funds in general. Although it looks similar, it works differently from conventional mutual funds. Here’s the explanation.

How Index Mutual Funds Work

The performance of index mutual funds usually resembles the index that is the reference. The good and bad performance of this mutual fund is not measured based on how much the return is, but is measured based on the difference between the performance of the product and its reference. So, even if the RD performance of the index is higher than the benchmark and the difference is large, the performance is still not good.

The difference between mutual funds and their references is popular with the term tracking error. The smaller the difference, the better the performance of the RD Index. Moreover, if the tracking error score = 0, the performance of the mutual fund is considered perfect, because it is exactly similar to the reference.

Examples of Index Mutual Funds

Reporting from Kontan, in Indonesia there are a total of 48 products listed as index mutual funds. Popular stock indices as a reference include Idx30, Lq45, and Sri-Kehati. Here are some examples of RD Index products based on their reference:

1. Idx30

Idx30 is an index that measures the performance of 30 stocks that have a large capitalization. The Stocks that entered idx30 were drawn from the best 30 of the Lq45 index with exclusive criteria, ranging from liquidity (Transaction value, transaction frequency, transaction days in the regular market, and market capitalization) to fundamental (Company financial performance, compliance, etc.)

The following is an example of an index mutual fund product that uses Idx30 as a reference.

  • Principal Index Idx30
  • Bni-Am Idx30 Index
  • FWD Asset Idx30 Index Equity Fund

2. Lq45

Lq45 is a complementary index of JCI that measures the performance of 45 stocks with high liquidity, large capitalization, and also good company fundamentals.

The following is an example of an index mutual fund product that uses Lq45 as a reference:

  • Avrist Index Lq45
  • Batavia Lq45 Plus
  • Independent Lq45 Index

3. Sri-Kehati

Sri-Kehati or Sustainable and Responsible Investment (Sri)-Kehati is an index created by the KEHATI Foundation referring to the United Nations Principles for Responsible Investment (Pri). The publication was done in similar work with Bei. Here is an example of an index fund that uses Sri-Kehati:

  • BNP Paribas Sri-Kehati
  • RHB Sri-Kehati Index Fund

Advantages of Index Mutual Funds

There are several advantages of this one financial product that can be considered before starting to invest.

1. Low Operational Costs

This product does not require very much cost for management purposes, because its management is passive. Passive management makes cost efficiency, because investment managers no longer need to pay for the services of analysts to take stock purchase terms for mutual fund portfolios. In the absence of trading activities, transaction costs become smaller. Therefore, it is not surprising that the operational costs of this product are smaller than the RD Shares.

2. Investment Risk is Not As Aggressive as Stock Mutual Funds

Although both fall into the category of long-term investments, because the portfolio contains stocks that are classified as high risk, the RD Index has a lower risk. The market risk of this product is more measurable, because it refers to the index.

Unlike the case with RD Stocks whose performance is strongly influenced by the investment tactics of the investment manager. So, unless the investment manager’s tactics are not good, it will have an impact on the poor performance of the Stock RD.

3. Investment Portfolio Transparency

Another advantage of index mutual funds is the transparency of the portfolio. This means that you can easily understand where your investment funds are allocated. For example, you buy an RD Index product whose reference is Idx30, then you just need to look at the list of stocks on the reference and voila! You will immediately understand, deh, your money investment manager allocates to any stock.

Disparity of Index Mutual Funds with Stock Mutual Funds

In general, the most fundamental disparity between index mutual funds and stock mutual funds is the way they are managed. RD Shares management is actively carried out to be classified as An Active Fund or Active Investing.

Active Fund is a mutual fund model whose investment managers actively analyze performance and project the prices of stocks and bonds. Not only that, but investment managers will also choose which stocks they will sell and buy. RD Stocks usually make JCI as the benchmark. The management of RD Shares is successful if its performance can exceed the JCI from time to time.

Unlike the case with the RD Index whose management is passively paid so that we can also call it Passive Fund or Passive Investing. Investment managers simply imitate the portfolio options of a stock index or bonds in the capital market. So, investment managers don’t have to bother doing performance analysis and projecting the prices of stocks.

List of RD Index Products in Tanamduit that You Can Buy

If you are interested in investing in this type of mutual fund, here is a list of products that you can buy at tanamduit.

  • BNP Paribas Sri-Kehati
  • Principal Index Idx30 Class O
  • FWD Idx30 Index Equity Fund
  • Bni-Am Idx30 Index
  • Syailendra MSCI Indonesia Value Index Fund
  • UOBAM Business Index-27
  • Danareksa Sharia Index
  • Examples of Index Mutual Funds

After knowing the explanation of index mutual funds, you may want to understand for example in Indonesia. As a reference, products with good performance are those that have a small difference between yields and their indices.

The following is an example of an index mutual fund in Indonesia.

Premier Idx30

The first is the idx30 premiere. The investment manager is PT Indo Premier Investment Management. This index mutual fund was launche on November 1, 2016.

Panin Idx30

The mutual fund was release on December 28, 2017. The investment manager is PT Panin Asset Management. The minimum initial investment of this index mutual fund is IDR 100,000.

Syailendra Idx30 Index

The investment manager of this investment product is PT Syailendra Capital. The pt was establishe in 2006. PT Syailendra Capital focuses on managing conventional mutual funds, Rdpt, and discretionary funds.

Simas Idx30

The investment manager in this investment product is PT Sinarmas Asset Management. This pt was establishe on April 9, 2012. PT Sinarmas Asset Management serves professional management as well as prudent. This pt serves the management of various mutual fund investment products.

Avrist Index Lq45

The investment manager in this investment product is PT Avrist Asset Management or calle Avram. The company was founded in 2011 and was license on June 18, 2012. Avram is a subsidiary of PT Avrist Assurance. The company’s parents focused on investments with a large share capitalization, high liquidity, and also a good financial situation.

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Index mutual funds are one of the long-term investment options that can be an alternative to stock mutual funds. Buying this product is too likely for you to know transparently what stocks are in the mutual fund portfolio that you are buying. On the other hand, the yield on this product is not as high as RD Stocks, although in the long run the performance of index mutual funds is still attractive.

Well, those are some reviews about index funds with the explanation above, hopefully it will be useful and thank you.

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