Index Funds

Index funds are a type of mutual fund that aim to replicate the performance of a specific index in the stock market. In India, these indices often include the Nifty 50, Sensex, Nifty Next 50, and others. By investing in an index fund, investors gain exposure to a broad range of companies within the selected index, offering a diversified and low-cost investment strategy.

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Best Index Mutual Funds to Invest

Fund Categories
AMC/Fund Houses
ICICI Prudential Asset Management Company LimitedSBI Funds Management LtdHDFC Asset Management Co LtdKotak Mahindra Asset Management Co LtdNippon Life India Asset Management LtdAditya Birla Sun Life AMC LtdAxis Asset Management Company LimitedUTI Asset Management Co LtdMirae Asset Investment Managers (India) Private LimitedTata Asset Management LimitedDSP Asset Managers Private LimitedBandhan Asset Management Company LimitedDSP Investment Managers Private LimitedHSBC Asset Management(India)Private LtdIDFC Asset Management Company LimitedCanara Robeco Asset Management Co. Ltd.Franklin Templeton Asst Mgmt(IND)Pvt LtdEdelweiss Asset Management LimitedQuant Money Managers LimitedInvesco Asset Management (India) Private LtdPPFAS Asset Management Pvt. LtdMirae Asset Mutual FundSundaram Asset Management Company LtdMotilal Oswal Asset Management Co. LtdMirae Asset Global Inv (India) Pvt. LtdBaroda BNP Paribas Asset Management India Pvt. Ltd.LIC Mutual Fund Asset Management LimitedJM Financial Asset Management LimitedPGIM India Asset Management Private LimitedDaiwa Asset Mgmt. (India) Pvt. Ltd.Mahindra Manulife Investment Management Pvt. Ltd.Fund PineBridge Mutual FundUnion Asset Management Co. Pvt. Ltd.Baroda Asset Management India LimitedPrincipal Asset Management Private LimitedWhiteOak Capital Asset Management LimitedBajaj Finserv Asset Management LimitedJPMorgan Asset Management India Pvt. Ltd360 ONE Asset Management LimitedEdelweiss Mutual FundBank of India Investment Managers Private LimitedITI Asset Management LimitedNavi AMC LimitedNJ Asset Management Private LimitedICICI Prudential Asset Mgmt.Company LimitedFranklin Templeton Asset ManagementIDBI Asset Management LimitedQuantum Asset Management Co Pvt. Ltd.Samco Asset Management Pvt LtdHelios Capital Asset Management (India) Private LimitedGroww Asset Management Ltd.Trust Asset Management Private LimitedTaurus Asset Management Company LimitedShriram Asset Management Co LtdZerodha Asset Management Private LimitedOld Bridge Asset Management Private LimitedING Investment Mgnt (India) Private Ltd.Baroda BNP Paribas Mutual Fund


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What are Index Funds?

Index funds have a portfolio that copies components of a stock market index such as Nifty 50 or Sensex. As per SEBI, 95% of the portfolio must be invested in stocks of the index that is being tracked. Thus, an index fund tries to generate returns by replicating the overall performance of an index.

Advantages of Investing in Index Funds

  • Lower Expense Ratio

    Due to their passive management style, index funds have lower expense ratios compared to actively managed funds. This cost efficiency can lead to higher net returns for investors over the long term.

  • Performance Consistency

    Index funds aim to match the performance of the underlying index. Historically, indices like the Nifty 50 and Sensex have shown robust growth, making index funds a reliable investment option for long-term wealth creation.

Taxation on Index Mutual Funds

  • Short-term capital gains (STCG)

    If you sell your index mutual fund units within a year of purchasing them, any profit earned is classified as short-term capital gains and is subject to a 15% tax rate.

  • Long-term capital gains (LTCG)

    If you hold your index mutual fund units for more than a year before selling, the profit is considered long-term capital gains. Any gains exceeding ₹1 lakh in a financial year are taxed at a rate of 10%.

Who Should Invest in Index Funds?

  • Cost Conscious Investors

    Index funds simply copy the composition of the stock market. Thus, you don’t have to pay very big fees for their management. It is one of the cheaper mutual funds you can invest in.

  • Unbiased Investing

    Unlike other mutual funds, there isn’t much scope for bias in index mutual funds. A fund manager has to invest as per the composition of the stock market index. The manager’s preferences can’t influence the portfolio.

Limitations of Index Funds

  • Market Volatility

    Since index funds replicate the performance of stock market indices, they are inherently subject to the same market volatility. This means they can suffer significant losses during market downturns, potentially erasing all previous gains during periods of severe market crashes.

  • Tracking Error

    Index funds may not perfectly mirror the performance of their respective indices due to tracking errors. These discrepancies can arise from various factors such as fund management fees, transaction costs, and cash holdings. Minimizing tracking error is essential to ensure that the fund's returns are as close as possible to the index it tracks.

Should You Choose Index Funds?

Frequently Asked Questions

Based on 3 year annualized returns, the best index funds to invest are:

S.noFund Name3 Year Returns
1Aditya Birla Sun Life Nifty Midcap 150 Index Fund27.81%
2Motilal Oswal Nifty Midcap 150 Index27.77%
3Nippon India Nifty Midcap 150 Index Fund27.52%
4UTI Nifty200 Momentum 30 Index27.31%
5Motilal Oswal Nifty Smallcap 250 Index Fund26.25%


Investing in index funds is typically recommended for long-term horizons, usually five to ten years or more. This longer timeframe allows you to benefit from the power of compounding and ride out market volatility, as the stock market tends to grow over the long run despite short-term fluctuations. Long-term investing in index funds also aligns with their passive investment strategy, which is designed to mirror the performance of the market or a specific index over time.

While index funds offer simplicity and lower fees, they come with certain disadvantages. They lack flexibility, as they strictly follow the index, and therefore cannot capitalize on market anomalies. Additionally, they generally deliver lower potential for high returns since they aim to match the index rather than outperform it. Lastly, index funds are fully exposed to market risk without any downside protection during market downturns.

Yes, they are subject to market risks. Since the market is highly volatile for such funds, the risk involved is also high.

As per SEBI, 95% of the portfolio is invested in stocks of the index which is being tracked.

As index funds mimic the market, there is nothing the fund manager can do to change the portfolio even if some particular stocks in the portfolio fare poorly.

Index mutual funds invest their money in companies that are part of a specific market index, such as the Nifty 50 or the Nifty Next 50. These funds aim to replicate the performance of the index by holding the same stocks in the same proportions. For example, a Nifty 50 index fund would invest in the 50 largest publicly traded companies in India, while a Nifty Next 50 index fund would invest in the next 50 largest companies following the Nifty 50.

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