Index Funds: Meaning, How They Work, and Examples

A stock index is a matrix that can describe the price movements of certain stocks. Referrals can be based on industry segments such as the IDX Health Sector (IDXHEALTH) or by business size stocks such as LQ45.

as it is stock indices IDX hopes to help people find the best stocks based on their needs. The stock index can also serve as a benchmark for the development of an industry. at one time as well

Investors can buy stocks in each index separately or buy instruments known as index funds. Find out what this investment tool is and how it works by listening to the following review.

Understanding Index Funds

An index fund (RD Index) is an investment tool that is managed in a way that yields investment returns close to the movement of the underlying index. For example, in the IDX30 RDS index, the instrument’s results should be very close to the IDX30 price movement. the most

to generate return on these investments. The investment manager allocates the investor’s funds to the stocks that make up the relevant index. For example, in a mutual fund that references the IDX30 index, the investment manager allocates the investor’s funds to invest in the shares of the IDX30 member. So indirectly invest in the 30 best stocks of the Indonesian capital market.

In addition to stocks This product is also available as a fixed income index fund. as the name suggests The price movement and allocation of investments in this tool also refers to bond indexes. Of course, RDs, stock indexes and bonds have different levels of risk.

Index funds are similar to Exchange-traded funds (ETFs)But it doesn’t trade on stock exchanges like ETFs.

Advantages of Index Funds

1. Low operating cost

The first advantage of this tool is operating costs (expense ratio) which is relatively lower than other types of mutual funds As these types of tools are handled patiently by investment managers. (Do not change stocks too often buying and selling, etc.), resulting in lower operating costs.

2. Lower risk than stock mutual funds

Make sure you know the difference first. in stock index mutual funds You will invest in stocks of some index members while in stock fund (RDS) Investment managers allocate your money to invest in multiple shares of the company. whether these stocks are included in the index or not.

For example, the LQ45 RD Index will be allocated to stocks that are definitely in the blue chip category, such as BBCA, BBRI, TLKM, etc. Unlike RDS, investment managers can combine BBCA, BBRI with stocks that are not included in the LQ45.

In addition, the risk of this instrument is lower than that of RDS because the fund will allocate some of its investment to money market instruments and bonds to help reduce the risk of investing in stocks You can find information about this allocation in each mutual fund’s fund information sheet.

This makes the risk of this product relatively low compared to RDS as you don’t have to worry about your money being allocated to good but high-risk stocks.

3. Able to track price movements

Because it does so closely with some stock indexes. You can see changes in the price of this product not only in the mutual fund buying and selling application you are using. but also search directly on the Internet by looking The price movement of the index used as a reference.

Of course you have to choose competent investment manager This ensures that index funds are properly managed.

4. Buy good stocks at affordable prices.

The advantage of the fourth RD index is the purchase of this instrument. You are indirectly buying good stocks that you cannot buy on a tight budget. For example, BBCA shares, you can only own them after spending more than IDR 700,000. However, with the LQ45 RD Index, you can buy them at a lower price. IDR 100,000

How do index funds work?

as mentioned above The investor’s money purchasing this type of mutual fund is allocated by the investment manager to the stocks or bonds of certain index members.

This indicates that:

1. If the value of the underlying index increases in the market, the price of the RD index must also increase.
2. The investment manager’s success rate is measured by the difference between the RD index price and the underlying market index value. The smaller the difference The better the efficiency of the investment manager involved, the better.

Some RD index products also benefit in the form of dividends, with companies whose investment managers pay dividends.

Index Fund Example

1. ABF Indonesia Bond Index Fund

The ABF Indonesia Bond Index Fund is an RD index published by Bahana TCW, one of the Indonesia’s Leading Investment Manager This is the result of a collaboration between PT Bahana Pembinaan Usaha and the Trust Company of the West. 100% of the client’s investment will buy government bonds that are included in certain bond indexes.

2. BNI-AM IDX30 Index

As the name suggests, the BNI-AM IDX30 Index is an investment product that is intended to copy the IDX30 price movement. Currently, the top 10 mutual fund holdings are ADRO, ASII, BBCA, BBNI, BBRI, BMRI, GOTO, MDKA, TLKM and UNTR.

3. BNP Paribas Sri Kehati

BNP Paribas Sri Kehati is an RD Index issued by BNP Paribas to track the price movements of Sri Kehati Stock Index. Sri Kehati is a stock index featuring 25 top performing companies that support sustainable development. In addition to shares, 20% of the total investment in this product is allocated to money market instruments.

4. Shariah Index Fund

If you are looking for a tool for Islamic stocks, Danareksa Index Syariah is the answer. 98% of the investment in this product will be allocated to stocks included in the Jakarta Islamic Index (JII), while the remaining 2% will be. money market instruments

to reduce the risk Therefore, this mutual fund is allocated equally for all sectors. From finance, mining to health, currently the top mobile for this tool are ADRO, CPIN, EMTK, ICBP, KLBF, INDF, TLKM, TPIA and UNVR.

That’s the index mutual fund discussion and example. So which product will you choose?