- What is an index investment fund?
- What is the difference between index and stock funds?
- What kind of people is the index investment fund suitable for?
- What are the types of index investment funds in Iran?
An index investment fund
To know what an index investment fund is, remember that you have heard many times in the daily news that the total stock market index has gone higher or lower today compared to the previous days. The total index of the stock exchange is the average activity of all symbols active in the stock exchange; But since large companies with higher assets have a greater impact on index changes, these companies are called index-making companies. An index investment fund operates based on investing in market index shares.
Index investment funds are one of the types of investment funds whose purpose is to follow one of the capital market indices and to be close to the stock market and the stock market index. Managers of index investment funds are trying to form a portfolio of securities with the composition and weights appropriate to a base index. But only stock market indices are suitable for investment funds in Iran, some of which are: total stock market index, equal weighted total index, top 50 companies index and 30 largest companies index.
These funds invest most of their capital in the target index markets. The purpose of an index-based investment fund is to match the investment portfolio with the stock market index.
An index-based investment fund necessarily invests its resources based on the pattern determined for one of the indices in the market. Currently, only 4 index investment funds are active in our country. It should be noted that the first index fund was created by an entrepreneur named John C. Bogle (John C. Bogle) founded, which was based on the “S&P 500” index.
What is the asset composition of an index investment fund?
The composition of assets of any investment fund reflects the strategy of that fund. In this sense, index funds are very similar to stock funds.
The difference between stock funds and index funds is in the selection of company stocks. That is, index funds tend to buy shares of large companies. Whereas stock funds consider any type of stock that leads to profit and do not consider the impact of that stock or symbol on the index.
The difference between index funds and equity funds
As we mentioned in the previous section, the only difference between index funds and stock funds is in the combination of assets and the selection of company stocks. Index funds buy shares of large companies active in the stock market, while the strategy of stock funds is to earn profit from buying any type of stock in the stock market.
Index investment funds devote 80% of their activity to buying shares of large companies and market index makers, and the rest of their activity is devoted to investing in bonds, fixed income deposits, and the like.
Benefits of an index investment fund
- Reducing portfolio management and fund management costs
- The possibility of earning a lot of profit due to stock market fluctuations
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Disadvantages of an index investment fund
What kind of people is the index investment fund suitable for?
The risk of investing in index funds is lower than the risk of investing in stock funds, and it has a higher participation rate in buying shares than other types of funds. For this reason, these types of funds are more interested in people who want to make safe investments in the stock market.
How to invest in index funds
Some investment funds operate in the form of (ETF), that is, they are offered in the form of shares in the stock market, and in order to invest in these funds, similar to buying shares, you need to have an exchange code and be a member of a brokerage.
Some other index funds are also offered as usual. To invest in these funds, you must purchase through the representative office or the company’s official website.
Types of index investment funds in Iran
Currently, the number of index funds active in the Iranian stock market is not high, but it seems that the number of these funds will increase in the future. Currently, three index funds and one fund based on the index of 30 large companies are operating in the capital market of Iran.
Index funds in Iran mostly operate on the basis of the total stock market index, and investing in them is usually through the online stock trading system. The most important feature of index funds is that their portfolio management and management costs are lower compared to common stock funds.
Entrepreneur index investment fund (issuance and cancellation)
The activity of this fund has started since 2009. The guarantor of the liquidity of this fund is the bank of the entrepreneur and the trustee of the fund is the investment consulting company. The units of this fund are traded by issuing and canceling. The return of the entrepreneur fund for the last one year was about -4% and since the beginning of its activity, it has returned more than 3200%.
Kardan Index Investment Fund (ETF)
The activity of Kardan index fund started in 2014 and since then it has yielded 1676%. In addition, the return of this fund for the past year was about -1.1%. The custodian of the fund is Kardan Audit Institute and investors can buy the units of this fund through the stock exchange.
Market-oriented index investment fund (ETF)
Bazarashna index fund has started its activity since the end of 2019. The trustee of this fund is Razdar Audit Institute and investors can trade the units of this fund through the stock exchange. The yield of this fund has been 17.9% since its inception.
Firouzeh 30 Large Companies Index Investment Fund (ETF)
Firouze index fund has been operating since 2013 and has been able to achieve 1563% return. The return of this fund for the last one year has been negative -5.10%. The trustee of this fund is Aghahan and Associates Audit Institute. The way to invest in this fund is to buy fund units through the stock market.
Index investment funds seek to obtain returns equal to one of the capital market indices. Index investment funds aim to follow an underlying index. The performance of these funds is very similar to stock funds, with the difference that they focus on investing in stocks that affect the index. At the moment, there are four prominent funds in Iran: Entrepreneur, Kardan, Bazar Ashna and Firouzeh.