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Know Briefly About Index Mutual Funds

We already know that mutual funds are a form of financial investment that has the potential to provide benefits for our future needs. 

Most of us also understand the four types of mutual funds that are generally present in Indonesia, namely money market mutual funds, fixed income mutual funds, equity funds and mixed mutual funds.

The Meaning of Index Mutual Funds

However, there are actually other types of mutual funds that can be used as an alternative investment for retail investors like us. One of them is index mutual funds and Exchange Traded Fund (ETF).

This mutual fund has a fairly high level of complexity compared to other conventional mutual funds, such as fixed income mutual funds and money market mutual funds. 

Index mutual funds are mutualfunds that are managed to obtain investment returns similar to an index that is used as a reference, be it a bond index or a stock index.

In other words, index mutual funds can also be interpreted as a type of mutual fund whose performance refers to a certain index, it could be a stock index or a bond index. 

However, the way it works is different from conventional mutual funds that focus on stocks and bonds.

Unlike conventional mutual funds, which try to beat the benchmark performance, the target of index mutual funds is to match them. 

So, instead of being actively managed, the approach of index mutual funds is passively by compiling an investment portfolio to resemble the reference index.

Because the composition is similar or even exactly the same as the reference index, the results will also of course be similar to the reference index. This method is also known as a passive management strategy.

Passive management results in cost efficiency because investment managers do not require a large number of analysts to conduct company analysis. 

Then, the transaction costs are also smaller because the investment manager does not actively trade buy and sell.

Therefore, index mutual funds are generally less expensive than conventional mutual funds. The good or bad performance of this mutual fund is not measured by how much return is generated or by how small the risk of price fluctuations is, but from the difference between the performance of the mutual fund and the reference index.

The bigger the difference, even though the mutual fund's performance is better, it is still considered not good because the ideal one is the same as the reference index. The difference between the mutual fund and the reference index is also known as tracking error. 

When the resulting difference is getting smaller, the investment manager who manages it is considered successful. If the resulting difference is tracking error=0, that would be even better.

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