{"id":12968,"date":"2022-07-05T16:43:17","date_gmt":"2022-07-05T11:13:17","guid":{"rendered":"https:\/\/kuvera.in\/blog\/?p=12968"},"modified":"2022-09-30T11:30:40","modified_gmt":"2022-09-30T06:00:40","slug":"when-to-use-index-mutual-funds-for-diversification","status":"publish","type":"post","link":"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/","title":{"rendered":"When To Use Index Mutual Funds For Diversification?\u00a0"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_40 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" area-label=\"ez-toc-toggle-icon-1\"><label for=\"item-69d79bb34bc8a\" aria-label=\"Table of Content\"><span style=\"display: flex;align-items: center;width: 35px;height: 30px;justify-content: center;direction:ltr;\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/label><input  type=\"checkbox\" id=\"item-69d79bb34bc8a\"><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#What_Is_A_Mutual_Fund\" title=\"What Is A Mutual Fund?\">What Is A Mutual Fund?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#What_are_some_of_the_dangers_of_investing_in_mutual_funds\" title=\"What are some of the dangers of investing in mutual funds?\">What are some of the dangers of investing in mutual funds?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#What_are_some_common_misconceptions_about_investing_in_mutual_funds\" title=\"What are some common misconceptions about investing in mutual funds?\">What are some common misconceptions about investing in mutual funds?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#An_index_fund_is_what\" title=\"An index fund is what?\">An index fund is what?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#How_To_Diversify_With_Index_Funds\" title=\"How To Diversify With Index Funds\">How To Diversify With Index Funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#How_are_Index_Funds_operated\" title=\"How are Index Funds operated?\">How are Index Funds operated?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#What_Are_The_Advantages_Of_Having_An_Index_Fund_In_Investment_Plan\" title=\"What Are The Advantages Of Having An Index Fund In Investment Plan?\">What Are The Advantages Of Having An Index Fund In Investment Plan?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#Lower_Transaction_Cost_Benefit_of_Index_Fund_Investing\" title=\"Lower Transaction Cost Benefit of Index Fund Investing\">Lower Transaction Cost Benefit of Index Fund Investing<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#Should_You_Invest_In_Index_Mutual_Funds\" title=\"Should You Invest In Index Mutual Funds?\">Should You Invest In Index Mutual Funds?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#What_factors_ought_to_be_taken_into_account_by_investors\" title=\"What factors ought to be taken into account by investors?\">What factors ought to be taken into account by investors?<\/a><ul class='ez-toc-list-level-4'><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#Returns_On_Index_Funds\" title=\"Returns On Index Funds\">Returns On Index Funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#Risk_Taking\" title=\"Risk Taking\">Risk Taking<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#Investment_costs\" title=\"Investment costs\">Investment costs<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-14\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#Taxes\" title=\"Taxes\">Taxes<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-15\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#Investment_Time_Frame\" title=\"Investment Time Frame\">Investment Time Frame<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-16\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#How_To_Diversify_With_An_Index_Fund\" title=\"How To Diversify With An Index Fund?\">How To Diversify With An Index Fund?<\/a><ul class='ez-toc-list-level-4'><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-17\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#Are_Index_Funds_Good_For_Diversification\" title=\"Are Index Funds Good For Diversification ?\">Are Index Funds Good For Diversification ?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-18\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#How_many_index_funds_do_you_need_for_a_diversified_portfolio\" title=\"How many index funds do you need for a diversified portfolio ?\">How many index funds do you need for a diversified portfolio ?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-19\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#Do_I_need_to_diversify_beyond_index_funds\" title=\"Do I need to diversify beyond index funds?\">Do I need to diversify beyond index funds?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-20\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/#Interested_in_how_we_think_about_the_markets\" title=\"Interested in how we think about the markets?\">Interested in how we think about the markets?<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<p><b>Why Does One Need Diversification In Investment?<\/b><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">By spreading investments over numerous financial instruments, industries, and other categories, diversification is an approach for lowering risk. By making investments in many sectors that would each respond to the same occurrence differently, it seeks to limit losses.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Diversification is the most crucial element of achieving long-term financial goals while avoiding risk, according to the majority of investing specialists, even though it does not guarantee against loss. Here, we examine the reasons for this and how to diversify your portfolio.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/kuvera.in\/explore\/fixed-deposit\/c\/all\"><img loading=\"lazy\" class=\"size-large wp-image-13417 aligncenter\" src=\"https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2022\/07\/FD-Banner_14-July-2022-1024x334.jpg\" sizes=\"(max-width: 640px) 100vw, 640px\" srcset=\"https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2022\/07\/FD-Banner_14-July-2022-1024x334.jpg 1024w, https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2022\/07\/FD-Banner_14-July-2022-300x98.jpg 300w, https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2022\/07\/FD-Banner_14-July-2022-768x250.jpg 768w, https:\/\/kuvera.in\/blog\/wp-content\/uploads\/2022\/07\/FD-Banner_14-July-2022.jpg 1080w\" alt=\"Online Fixed Deposits on Kuvera\" width=\"640\" height=\"209\" \/><\/a><\/p>\n<p>&nbsp;<\/p>\n<p><strong>Key Points<\/strong><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">By investing in instruments that cover a variety of financial instruments, industries, and other categories, diversification lowers risk.<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">While systematic or market risk is typically unavoidable, unsystematic risk can be reduced by diversification.<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Investors have the option of selecting their own assets to invest in or an index fund that is made up of a number of businesses and holdings.<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A diversified portfolio may be difficult to balance, expensive, and have lower returns due to reduced risk.<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Better possibilities, satisfaction in learning about new assets, and higher risk-adjusted returns may result from a diverse portfolio.<\/span><\/li>\n<\/ul>\n<p><b>\u00a0<\/b><\/p>\n<p>&nbsp;<\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_Is_A_Mutual_Fund\"><\/span>What Is A Mutual Fund?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">A <a href=\"https:\/\/kuvera.in\/explore\/mf\/c\/all\">mutual fund<\/a> is a professionally managed portfolio of securities that is dedicated to a certain investing strategy or asset class, such as stocks, bonds, and\/or other income vehicles. The mutual fund firm collects money from shareholders who purchase shares in the fund and invests it on their behalf. A share is a fraction of the holdings of the fund.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_are_some_of_the_dangers_of_investing_in_mutual_funds\"><\/span>What are some of the dangers of investing in mutual funds?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Mutual funds could expose investors to the following risks:<\/span><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Possibility of loss of principal.\u00a0<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Because portfolio managers are unable to guarantee the fund&#8217;s success, there is a chance that investors will lose their initial investment capital.<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Effect of diversification that dilutes.<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Diversification in a fund occasionally can reduce beneficial returns. For instance, the fund&#8217;s overall return might not change if one stock in the portfolio doubles in value.<\/span><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_are_some_common_misconceptions_about_investing_in_mutual_funds\"><\/span>What are some common misconceptions about investing in mutual funds?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">There are two widespread false beliefs regarding mutual funds:<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">The underlying assets of the fund are owned by investors. The largest misconception about investing in mutual funds is that investors own shares of the holdings of the fund. That is untrue; rather than owning shares of the fund&#8217;s underlying investments, investors own shares of the fund itself.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Stocks make up the sole component of mutual funds.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Another widespread misconception is that mutual funds exclusively contain equities. In actuality, mutual funds are able to invest in a wide range of asset classes, including cash, alternatives, fixed income, and non-traditional income sources like cash.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h3><span class=\"ez-toc-section\" id=\"An_index_fund_is_what\"><\/span>An index fund is what?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">An <a href=\"https:\/\/kuvera.in\/explore\/mf\/c\/all\/others\/index-funds\">index fund<\/a> is a form of mutual fund that invests in stocks that closely resemble those in a specific market index. This suggests that the scheme&#8217;s performance will be consistent with the benchmark index it monitors.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_To_Diversify_With_Index_Funds\"><\/span>How To Diversify With Index Funds<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">There may be hundreds of stocks or thousands of stocks in an index. The majority of such equities were beyond the means of the typical investor. Mutual funds that track an index are able to purchase all of those stocks because of their larger money pools, which are made up of the dollars of tens of thousands of investors. Every stock in the index is yours when you purchase even a single share of an index fund.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Additionally, money &#8220;weights&#8221; its purchases. Thus, some equities are purchased more frequently than others. This is so that the index can account for stocks that are more likely than others to have an impact on the index. An effective index fund will weight its acquisitions similarly to the index.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">In comparison to any one stock, an index has a significantly higher chance of recovering from a decline. An index fund that followed the Sensex, for instance, would have suffered a major loss in 2008. However, at the beginning of 2019, that same index would have had made major gains.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Does that imply that a person can assure a stock market recovery every time? Nobody ever asserts that. What we can say is that it always bounces back. Even though it doesn&#8217;t guarantee it will continue, the knowledge that it always has offers some comfort. However, if the index declines, a person with a short time horizon\u2014say, let&#8217;s five years or less\u2014could lose money during that period. That&#8217;s because they can&#8217;t afford to wait for it to heal for a few more years. This is why long-term investors, or those who want to hold a fund for six to ten years or longer, should choose index funds.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_are_Index_Funds_operated\"><\/span>How are Index Funds operated?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">A collection of securities that characterises a specific market sector is known as an index. Index funds are considered passive fund management since they follow a certain index. The traded securities in a passively managed fund are based on the underlying benchmark. Additionally, in order to spot opportunities and select the best stock, passively managed funds do not need a professional group of research specialists.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">An index fund is created to replicate the performance of its index, as opposed to an actively managed fund that works more and harder to time and outperform the market. As a result, the returns of index funds match those of the underlying market index.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">With the exception of a little variation known as tracking error, the returns are roughly equivalent to the benchmark. The fund management frequently makes an effort to minimise this inaccuracy.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_Are_The_Advantages_Of_Having_An_Index_Fund_In_Investment_Plan\"><\/span>What Are The Advantages Of Having An Index Fund In Investment Plan?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">The following are some benefits that index funds enjoy:<\/span><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li><b>Low Costs<\/b><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">An effective staff of research analysts is not necessary to assist fund managers in selecting the best companies because an index fund mirrors its underlying benchmark. Additionally, there is no stock trading going on. All of these elements contribute to an index fund&#8217;s reduced managing costs.<\/span><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li><b>Unbiased Investment<\/b><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Index funds invest via an automated, law-based process. The amount to be invested in index funds of different securities is specified in the fund manager&#8217;s mandate. By doing this, human judgement or prejudice in making investment decisions is eliminated.<\/span><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li><b>Widespread Exposure<\/b><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">To guarantee that the portfolio is diversified across all industries and stocks, investments should be made in a ratio that is similar to that of an index. As a result, an investor can use a single index fund to capture the likely returns on the broader sector of the market. If you choose to invest in the Nifty index fund, for example, you will have access to 50 securities distributed over 13 different industries, from pharmaceuticals to financial services.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Lower_Transaction_Cost_Benefit_of_Index_Fund_Investing\"><\/span>Lower Transaction Cost Benefit of Index Fund Investing<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Due to their passive management, index funds often have low turnover, or few trades made by a fund manager in a given year. Less trading means there is lower transaction cost involved with running of an index fund.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li><strong>Simpler To Control<\/strong><\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Index funds are simpler to manage since fund managers don&#8217;t have to worry about how the market is treating the stocks that make up the index. All a fund manager needs to do is periodically rebalance the portfolio.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Should_You_Invest_In_Index_Mutual_Funds\"><\/span>Should You Invest In Index Mutual Funds?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Your investing horizon, goals, and risk tolerance should all be taken into consideration when choosing mutual funds. Investors who are risk-averse should use index mutual funds. Such monies don&#8217;t n m eed in-depth investigation and tracking. For instance, you can choose a Nifty or Sensex index fund if you want to invest in stocks but do not want to expose yourself to the dangers involved with actively managed equity funds.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_factors_ought_to_be_taken_into_account_by_investors\"><\/span>What factors ought to be taken into account by investors?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Before choosing to invest in index funds, you should think about the aspects listed below:<\/span><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li>\n<h4><span class=\"ez-toc-section\" id=\"Returns_On_Index_Funds\"><\/span>Returns On Index Funds<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Index funds seek to match the market index&#8217;s performance. They do not strive to outperform actively managed funds&#8217; benchmark. Due to tracking issues, the returns generated could occasionally fall short of those of the underlying index. The index fund will perform better the lower the errors are.<\/span><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li>\n<h4><span class=\"ez-toc-section\" id=\"Risk_Taking\"><\/span>Risk Taking<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Index funds are less vulnerable to risks and volatility associated with equities because they represent a specific market index. It makes sense to invest in index funds to get the best returns during a market upswing. However, because index funds frequently lose value during a depression, things might become ugly. Having a mix of actively and passively managed index funds in your portfolio is therefore always advisable.<\/span><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li>\n<h4><span class=\"ez-toc-section\" id=\"Investment_costs\"><\/span><strong>Investment costs<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">When compared to actively managed funds, the expense ratio for index funds is typically 0 less. For index funds, the fund manager is not required to develop an investment strategy. Even a fund with a lower expense ratio, it should be remembered, has the potential to produce larger returns on investment.<\/span><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li>\n<h4><span class=\"ez-toc-section\" id=\"Taxes\"><\/span>Taxes<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">When you redeem the units of your index fund investment, you make capital gains that are taxed. The holding period, or length of time you remain invested, determines the taxes rate. Gains made with a holding duration of up to one year are classified as short-term capital gains (STCG) and are subject to a 15% tax (plus surcharge as applicable plus 4 percent Health &amp; education cess). If the total long-term capital gains from <a href=\"https:\/\/kuvera.in\/explore\/mf\/c\/all\/equity\">equity-oriented mutual funds<\/a> \/equity shares exceed Rs. 1,00,000 in a year, the long-term capital gains (LTCG) from funds held for more than 12 months incur long-term capital gains tax at 10% (with surcharge as applicable + 4% Health &amp; education cess).<\/span><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li>\n<h4><span class=\"ez-toc-section\" id=\"Investment_Time_Frame\"><\/span>Investment Time Frame<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Index funds are subject to large changes quickly. If these variations persist for a long time, they might even out the returns on your investment. Therefore, index funds are the best choice for investors with a lengthy time horizon. If you decide to invest in index funds, you must have the patience to wait for the fund to reach its full performance potential.<\/span><\/p>\n<p>&nbsp;<\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_To_Diversify_With_An_Index_Fund\"><\/span>How To Diversify With An Index Fund?<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">TheSensex and the Nifty 50 are two indexes that are used to track the overall stock market. You can, however, also invest in funds that follow specific industries, such as those in the energy, technology, banking, consumer goods, and so forth. Any industry you can think of has an index for it, and a fund that tracks that index has also been formed. An investor can purchase a fund that tracks a sector they believe will beat the overall market while remaining diversified within that industry.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">This suggests an additional method for diversifying with index funds. Additionally, you can be diversified if you invest in a variety of sector funds. In other words, odds are that another index fund will perform well if your oil fund doesn&#8217;t. Therefore, you are diversified not only within each area, but also through investing money in many sectors.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Make sure you are aware of the investments made by each fund to avoid having duplicate assets. A purchase of an oil fund, for instance, would undoubtedly replicate some of the securities in an energy fund.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><b>FAQ<\/b><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li>\n<h4><span class=\"ez-toc-section\" id=\"Are_Index_Funds_Good_For_Diversification\"><\/span>Are Index Funds Good For Diversification ?<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Index fund have historically proven to be an extremely effective investment tool, they ensures that each penny of yours is invested in a diverse basket of stocks\/securities. Given the minimal human intervention they are free from biases too.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li>\n<h4><span class=\"ez-toc-section\" id=\"How_many_index_funds_do_you_need_for_a_diversified_portfolio\"><\/span>How many index funds do you need for a diversified portfolio ?<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Even investing in a single index fund can provide you with relevant diversification.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<ul>\n<li>\n<h4><span class=\"ez-toc-section\" id=\"Do_I_need_to_diversify_beyond_index_funds\"><\/span>Do I need to diversify beyond index funds?<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Index funds invest in the stock market, it is advisable to invest a certain portion of your investment budget in non market linked investments too such as fixed deposits, gold.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Did you know? You can now invest in <a href=\"https:\/\/kuvera.in\/explore\/mf\/c\/all\/hybrid\/arbitrage-fund\">arbitrage funds<\/a> on Kuvera:<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Step 1: Download the Kuvera app or visit our website.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Step 2: Create your account on Kuvera by completing the mandatory KYC procedure. This will hardly take a few minutes. Once that\u2019s completed,\u00a0 select the \u2018Invest\u2019 option on our homepage after which you can select \u2018Mutual Funds\u2019 and \u2018Index\u2019.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Step 3: Kindly go through the list of all zero-commission direct plans of index funds to start investing.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<h4><span class=\"ez-toc-section\" id=\"Interested_in_how_we_think_about_the_markets\"><\/span>Interested in how we think about the markets?<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p>Read more: <a href=\"https:\/\/kuvera.in\/blog\/category\/zen-and-the-art-of-investing\/\" target=\"_blank\" rel=\"noopener noreferrer\"><strong>Zen And The Art Of Investing<\/strong><\/a><\/p>\n<p>Watch\/hear on YouTube:<\/p>\n<p>&nbsp;<\/p>\n<p><iframe loading=\"lazy\" title=\"Where to invest for one-year?\" width=\"640\" height=\"360\" src=\"https:\/\/www.youtube.com\/embed\/f7yfzUhQDiM?list=PLDSzQdT9nLmBFD2p94O5p2pZ4vEUR-Thz\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture\" allowfullscreen><\/iframe><\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>Start investing through a platform that brings goal planning and investing to your fingertips. Visit <a href=\"https:\/\/app.kuvera.in\/\"><strong>Kuvera.in<\/strong><\/a> to discover <a href=\"https:\/\/kuvera.in\/blog\/direct-plans-better\/\"><strong>Direct Plans<\/strong><\/a> and <strong><a href=\"https:\/\/app.kuvera.in\/explore\/fixed-deposit\/c\/all\">Fixed Deposits<\/a><\/strong> and <a href=\"https:\/\/kuvera.in\/user\/login\"><strong>start investing today.<\/strong><\/a><\/p>\n<p>#MutualFundSahiHai #KuveraSabseSahiHai!<\/p>\n<p>&nbsp;<\/p>\n<hr \/>\n\n<table id=\"tablepress-2103\" class=\"tablepress tablepress-id-2103\">\n<thead>\n<tr class=\"row-1 odd\">\n\t<th class=\"column-1\"><\/th><th class=\"column-2\">Top Asset Management Companies<\/th><th class=\"column-3\"><\/th>\n<\/tr>\n<\/thead>\n<tbody class=\"row-hover\">\n<tr class=\"row-2 even\">\n\t<td class=\"column-1\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/idfc\">IDFC Mutual Fund<\/a><\/td><td class=\"column-2\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/quant\">Quant Mutual Fund<\/a><\/td><td class=\"column-3\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/canara\">Canara Robeco Mutual Fund<\/a><\/td>\n<\/tr>\n<tr class=\"row-3 odd\">\n\t<td class=\"column-1\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/tata\">Tata Mutual Fund<\/a><\/td><td class=\"column-2\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/dsp\">DSP Mutual Fund<\/a><\/td><td class=\"column-3\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/uti\">UTI Mutual Fund<\/a><\/td>\n<\/tr>\n<tr class=\"row-4 even\">\n\t<td class=\"column-1\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/whiteoak\">Whiteoak Mutual Fund<\/a><\/td><td class=\"column-2\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/motilal\">Motilal Oswal Mutual Fund<\/a><\/td><td class=\"column-3\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/mirae\">Mirae Asset Mutual Fund<\/a><\/td>\n<\/tr>\n<tr class=\"row-5 odd\">\n\t<td class=\"column-1\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/icici\">ICICI Prudential Mutual Fund<\/a><\/td><td class=\"column-2\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/hdfc\">HDFC Mutual Fund<\/a><\/td><td class=\"column-3\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/absl\">Aditya Birla Sunlife Mutual Fund<\/a><\/td>\n<\/tr>\n<tr class=\"row-6 even\">\n\t<td class=\"column-1\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/barodabnpparibas\">Baroda BNP Paribas Mutual Fund<\/a><\/td><td class=\"column-2\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/invesco\">Invesco Mutual Funds<\/a><\/td><td class=\"column-3\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/jm\">JM Financial Mutual Funds<\/a><\/td>\n<\/tr>\n<tr class=\"row-7 odd\">\n\t<td class=\"column-1\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/tata\">Tata Mutual Funds<\/a><\/td><td class=\"column-2\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/nippon\">Nippon Mutual Funds<\/a><\/td><td class=\"column-3\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/franklin\">Franklin Templeton Mutual Funds<\/a><\/td>\n<\/tr>\n<tr class=\"row-8 even\">\n\t<td class=\"column-1\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/sundaram\">Sundaram Mutual Fund<\/a><\/td><td class=\"column-2\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/edelweiss\">Edelweiss Mutual Funds<\/a><\/td><td class=\"column-3\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/l_t\">L&amp;T Mutual Funds<\/a><\/td>\n<\/tr>\n<tr class=\"row-9 odd\">\n\t<td class=\"column-1\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/axis\">Axis Mutual Fund<\/a><\/td><td class=\"column-2\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/kotak\">Kotak Mutual Fund<\/a><\/td><td class=\"column-3\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/lic\">LIC Mutual Fund<\/a><\/td>\n<\/tr>\n<tr class=\"row-10 even\">\n\t<td class=\"column-1\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/dsp\">DSP Mutual Fund<\/a><\/td><td class=\"column-2\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/iifl\">IIFL Mutual Fund<\/a><\/td><td class=\"column-3\"><a href=\"https:\/\/kuvera.in\/explore\/funds\/parag\">Parag Parikh Mutual Funds<\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<!-- #tablepress-2103 from cache -->\n","protected":false},"excerpt":{"rendered":"<p>Why Does One Need Diversification In Investment? &nbsp; By spreading investments over numerous financial instruments, industries, and other categories, diversification is an approach for lowering risk. By making investments in many sectors that would each respond to the same occurrence differently, it seeks to limit losses. &nbsp; Diversification is the most crucial element of achieving [&#8230;]<\/p>\n<p><a class=\"btn btn-secondary understrap-read-more-link\" href=\"https:\/\/kuvera.in\/blog\/when-to-use-index-mutual-funds-for-diversification\/\">Read More&#8230;<\/a><\/p>\n","protected":false},"author":11,"featured_media":12970,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false},"categories":[99,822],"tags":[1068,83,43,1007,723,1074],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>When to use Index Funds for Diversification? - Kuvera<\/title>\n<meta name=\"description\" content=\"When you purchase an index funds, you&#039;ll be exposed to stock in the Index. 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