Multiple choice

Which of the following is not true for Index Funds?

  1. These funds invest in the shares that constitute a specific index

  2. The investment in shares is in the same proportion as in the index

  3. These funds aim to minimize the tracking error

  4. These funds are not diversified
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Index funds ARE inherently diversified because they invest in all securities constituting a particular index, which typically includes 30-50 different stocks (e.g., Nifty has 50 stocks). Saying index funds are 'not diversified' is factually incorrect. The other statements about index funds - that they invest in index shares, in the same proportion as the index, and aim to minimize tracking error - are all true characteristics. Option D correctly identifies the false statement.

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