Index funds are meant for the long-term investor

What is an index fund? It is a fund that invests in the exact proportion determined by this independent body in each and every one of the stocks that are present in the index. Such a fund must have a very good dealer (that is, a person who buys and sells stocks) but does not need a fund manager.

Index funds are meant for the long-term investor, it is said. In my view a long term equity investor is a person who buys equity like our mothers used to buy gold–buy it when you have the money; sell to meet an emergency or to buy a longer term asset, like a house or a married life or an education for a child! Anyone who invests or disinvest by timing the market is not a long-term investor.

The key risk that a long-term investor runs, when investing in equity is either that the company he chose becomes a non-performer or the person who chose it for him becomes a non-performer. The greatest advantage of an index fund is that you have to worry less about such events: the index committee or agency, whose members may change but whose processes are person-independent, takes care of such developments on an on-going basis.

They do not take the decision based on hot tips or broker influence and are not affected by the departure of that divine fund manager. Which is why, as markets become more and more efficient, most long term investors prefer to invest in index funds.