Understanding Index Mutual Funds: Characteristics, Differences from Equity Funds, and Product Examples
Mutual funds are increasingly popular in Indonesia as they are considered practical and easily accessible for both novice and experienced investors. According to Bareksa, index mutual funds became the type of mutual fund with the largest assets under management as of September 2025.
In the context of investment, an index is a statistical measure that reflects the overall price movement of a group of shares selected based on specific criteria and methodology. An index mutual fund is therefore a type of mutual fund managed with the objective of tracking the performance of a particular index. This means the investment manager does not actively select shares based on personal analysis to beat the market, but rather constructs a portfolio so that its movement closely mirrors the reference index.
The requirement for a mutual fund to be called an index mutual fund is that it must invest at least 80% of its total funds in securities listed on that index. Commonly used indices include the Jakarta Composite Index (IHSG), LQ-45, IDX30, Kompas100, and others. For example, if an index mutual fund uses the IDX30 as its benchmark, the majority of funds will be placed in shares that are members of the IDX30 index with a similar composition. Because this type of mutual fund tracks an index, its performance will move in line with the market conditions of its benchmark. If the index rises, the investment value has the potential to rise. Conversely, if the index falls, the investment value may also fall.
Index mutual funds differ from equity mutual funds. Index mutual funds do not buy and sell through selling agents, but rather through the stock exchange. The investment manager will buy and sell shares based on share price developments on the exchange.
Index mutual funds have several special characteristics that distinguish them from other types of mutual funds:
- Possess a Clear Reference Index
The main characteristic of an index mutual fund is the existence of a benchmark or index as the basic reference for portfolio management. This means the investment manager is not free to choose shares arbitrarily, but must follow the composition of the index. Some commonly used indices in Indonesia include the Jakarta Composite Index (IHSG), LQ45, IDX30, IDX80, Sri-Kehati, Jakarta Islamic Index (JII), MSCI Indonesia, and the FTSE Indonesia Index. Each index has a different methodology, so the characteristics of the index mutual fund will also vary depending on the reference index. For instance, if an index mutual fund uses IDX30 as a benchmark, the managed funds will be placed in large-cap shares. If it uses the Sri-Kehati index, the managed funds will tend to be placed in issuers with Environmental, Social, and Governance (ESG) practices. There are also index mutual funds that rely on sharia indices such as JII, so the managed funds will be placed in sharia-compliant shares.
- Portfolio Composition Must Mirror the Index
An index mutual fund is not merely “inspired” by an index, but is indeed required to replicate its reference index. This is regulated in POJK Number 48/POJK.04/2015 concerning Guidelines for the Management of Protected Mutual Funds, Guaranteed Mutual Funds, and Index Mutual Funds. Article 10 states that an investment manager intending to issue an index mutual fund must provide additional information in the prospectus regarding investment provisions, including: at least 80% of the fund’s Net Asset Value must be invested in securities that are part of the index; the investment in securities within the index must constitute at least 80% of all securities in that index; and the weighting of each security in the index mutual fund must be at least 80% and at most 120% of the weighting of each security in the reference index. In short, the investment manager must allocate a minimum of 80% to the shares in the index. The third point of the article states that the weight of each share in the index mutual fund must be a minimum of 80% and a maximum of 120% of the share’s weight in the reference index. For example, if the index contains BBCA shares with a weight of 15%, the index mutual fund using that index as a benchmark must place managed funds in BBCA shares at a figure not too far from 15%.
- Passively Managed
Unlike equity mutual funds, index mutual funds use a passive investing strategy. The investment manager does not try to find shares that can “beat the market”, but merely attempts to track the index as accurately as possible. As a result, share buying and selling activity is less frequent and share analysis is not overly aggressive. The portfolio typically changes only when the Indonesia Stock Exchange (BEI) conducts an index rebalancing. This strategy makes transaction costs and management fees relatively lower compared to equity mutual funds.
- Portfolio Rebalancing Follows Index Changes
In line with the previous characteristic, a stock index is not permanent. The BEI can periodically change the index composition through a rebalancing process. Each period, there will be shares that enter and are removed from the index. Additionally, share weights and market capitalisation also change. When this rebalancing occurs, the investment manager must also adjust the index mutual fund’s portfolio. For example, if a share is removed from the IDX30, an IDX30-based index mutual fund will usually also reduce or divest that share.
- Diversification Follows the Index Structure
Since an index mutual fund contains many shares at once, its diversification automatically follows the structure of the reference index.