If you are an avid investor, it is hard to miss the buzz around the S&P 500 since it is one of the most powerful benchmark indices in the market. Asset managers and investors continuously try to beat it to earn an attractive return, while many others invest in S&P index funds to receive a healthy return on their portfolio. Global investors invest in index fund through the S&P 500 funds to gain exposure to US corporations.
Now let’s see how you can invest in S&P and boost your investment.
What Is S&P 500?
However, it is not an actual list of the largest corporations in the US in terms of market capitalisation. As a market index, S&P 500 also considers several other factors for the list. We will come to those later. For now, let’s see how S&P calculates the weighted capital capitalisation of companies. The formula it uses is the following.
Weighting capitalisation in S&P = company market capital/ total of all market capital
But there is more than just calculating the weighted average. The S&P committee is responsible for selecting the stocks to feature in the top 500 list, base their analysis on a host of factors like market capital, liquidity, and sector allocation.
Many of the companies that feature in S&P 500 are tech and financial companies. It contains names like Facebook, Netflix, Disney, McDonald, Microsoft, Google, Coca-Cola, Apple, Xerox, and more. With 63 years of track record, S&P 500 is one of the oldest market indices and the most powerful. It is followed globally, and not only US investors but also investors from other countries invest in S&P 500 companies through various mutual index funds and ETFs.
If you want to invest in S&P companies but don’t want to go through the process of combing through each company for investing, you can put your money through an S&P index fund.
What’s An S&P 500 Index Fund?
- It helps you to diversify your portfolio and gain broader exposure through investing in the top corporations
- Both index mutual funds and ETFs try to replicate the return generated by the index and,in return, offer investors access to all the securities offered by the index
- Funds investing in the index tend to have very low fee and multiple options to select from, making it attractive to investors who want to limit their risk exposure while optimising their return
Why Is It Worth Investing In S&P 500?
By investing in S&P 500 index funds, you can invest in the most influential companies.
The index has a proven track record which clocked a return of 12.7 and 17.8 percent CAGR in rupee terms in the last five and ten years, respectively, higher than all the Indian indices, which generated a return of 4-6 percent for the same period.
S&P 500 index didn’t decline month on month from 2000 to 2012. After the tech crash in 2000, it recovered to generate a robust return. In 2003 the Vanguard S&P 500 index fund (VFIAX) returned 28.59 percent.
Investing in the S&P 500 index fund allows low-cost diversification. S&P 500 has generated good returns over long-term. If you stay invested for a long-time and tide over market volatilities, S&P 500 index generates a handsome return.
How Can Indian Investors Invest In S&P 500 Index Funds?
From April 2020, changes in regulations have made it easier for Indian investors to invest in S&P stocks through India’s first index fund, Motilal Oswal S&P 500 Index Fund, and Vanguard S&P 500 ETF Fund.
Vanguard S&P 500 ETF Fund
In 1976, Vanguard introduced the first mutual funds that mimicked the S&P 500 return. Twenty years later, it introduced the first exchange-traded fund (ETF) following the same S&P stocks, given individual investors exposure to investing in the top corporation through one investment.
Motilal Oswal S&P 500 Index
It is an open-ended index fund to mimic the return of S&P firms. It is designed to ape the movement of the index, and hence, there is no fund manager to select the stocks for you. It will generate return like the S&P index, available in both regular and direct plan versions. Investors can invest in a lump sum or set up a SIP plan.
The fund only has a growth option, which means investors need to redeem their units at a higher price as the fund doesn’t pay a dividend.
Charges and minimum investment limit
Motilal Oswal S&P 500 mutual fund charges an expense ratio of 0.5 percent on the direct plan and 1 percent on the regular plan. Now one can start investing in the S&P index with Rs 500.
What Benefits Indian Investors Can Get By Investing In S&P 500 Mutual Fund?
Index fund suits risk-averse investors. If you don’t want the trouble to track your mutual fund investment regularly, investing in index funds is safe with a more predictable return. Another advantage is that index funds are passively managed without a fund manager selecting the stocks. The fund merely invests in stocks already present in the index.
It offers low-cost diversification in the US stocks to receive a higher return from an index that generated a steady performance. The companies listed in S&P 500 are multinational with massive global outreach, means you’ll be investing in leading digital, financial, and core sector industries across several sectors.
As the dollar continues to accelerate in value, the import is becoming expensive for Indians. Even the cost of education in US universities is becoming costly. It is likely to will continue in the future, so having a portion of your investment invested in S&P 500 funds where you can earn in dollar offers a hedge against appreciating dollar value.
The introduction of the NFO (new fund offer) allows Indian investors to invest in US stocks in a flexible manner. Even small investors can invest in the top global companies through S&P 500 mutual fund since the minimum investment amount is Rs 500. However, we suggest you evaluate the NFO carefully before investing.