Index funds offer a more diversified and low-cost investment option that can provide stable returns over time.
They track the performance of an entire market index, such as the Nifty 50 or the BSE Sensex, which is in sharp contrast to the actively managed mutual funds that rely on a fund manager’s experience & ability to beat the market returns.
10 Best Index Funds to Invest in India – 2023
| Best Index Funds | 5-year Returns | Last 1-Year Return | Expense Ratio | Min SIP |
| Tata Nifty 50 Index Fund -Direct Plan | 12.23% | -0.681% | 0.16% | Rs. 1000 |
| UTI Nifty 50 Index Fund – Growth Option- Direc | 12.22% | -0.812% | 0.20% | Rs. 500 |
| Nippon India Index Fund – Nifty 50 Plan – Direct Plan Growth Plan – Growth Option | 12.13% | -0.816% | 0.20% | Rs. 100 |
| ICICI Prudential Nifty 50 Index Fund – Direct Plan Cumulative Option | 12.13% | -0.819% | 0.16% | Rs. 500 |
| BANDHAN Nifty 50 Index Fund – Regular Plan-Growth | 12.05% | -1.066 | 0.10% | Rs. 100 |
| SBI NIFTY INDEX FUND – DIRECT PLAN-GROWTH | 12.02% | -0.827% | 0.18% | Rs. 500 |
| IDBI NIFTY 50 Index Fund Growth | 12.01% | -0.919% | 0.32% | Rs. 500 |
| Taurus Nifty 50 Index Fund – Direct Plan – Growth | 11.98% | -0.405% | 0.44% | Rs. 1000 |
| LIC MF Nifty 50 Index Fund-Direct Plan-Growth | 11.93% | -0.702% | 0.20% | Rs. 1000 |
| HDFC Index Fund-NIFTY 50 Plan – Growth Plan | 11.92% | -1.037% | 0.20% | Rs. 100 |
Disclaimer – it is essential to remember that past performance is not a guarantee of future results.
You should consider your investment goals, risk tolerance, and investment horizon before choosing a fund.
Or rather consult your financial advisor before investing in an index fund.
Why Invest in Index Funds
Reasons you should consider while investing in index funds are –
#1. Diversification
Index funds provide exposure to a broad range of stocks, providing investors with diversification benefits.
Diversification is essential because it reduces the overall risk of the portfolio. You can diversify your investment portfolio of 1 crore to earn monthly income in India.
#2. Low-Cost
Index funds are low-cost, as they do not require active management. This can help investors save on fees and improve overall returns.
The expense ratio range from 0.10% to 0.50% max.
#3. Consistency
Index funds aim to replicate the performance of the underlying index, which can lead to consistent returns over the long term.
You are assured of returns similar to the index that the fund tracks.
For example, if Bank Nifty gave 15% returns in a particular year. Then Bank Nifty index fund will target to replicate give 15% returns. You can go through our article how to invest in Bank Nifty through Index funds.
Differences in returns if any can be due to tracking error* or fund expenses.
*Tracking error – is the deviation in weights of index funds via a-vis benchmark index. This will result in deviation in the returns of the index fund and its target index.
3 factors that lead to tracking errors in index funds are –
- Expense ratio
- Cash holdings
- Buying/selling underlying index stocks
#4. Transparency
Since index funds track a specific index, their holdings, and performance are transparent and easy to understand.
You can always cross-check the stock weights with the underlying index.
#5. Accessibility
Index funds are widely available and can be easily purchased through a broker or an online investment platform. You can go through our comparison of the Upstox vs Groww to know the brokerage charges of both stock brokers.
How to Choose an Index Fund
Factors to consider when choosing an index fund to invest in are –
#1. Expense Ratio
Look for funds with low expense ratios, as this can help you save on fees and improve overall returns.
#2. Tracking Error
Check the fund’s tracking error, which measures how closely the fund tracks the underlying index. A lower tracking error is generally better.
#3. Fund Size
Invest in funds with sufficient assets under management (AUM), as this can indicate that the fund is well-established and has adequate resources to manage its investments effectively.
#4. Fund House
Consider the reputation and track record of the fund house offering the fund, as this can provide insights into the fund’s management style and approach.
Reputed mutual fund houses in India are –
- LIC mutual fund
- ICICI Prudential mutual fund
- SBI mutual fund
- HDFC mutual fund
- UTI mutual fund
You may like to read how to earn Rs. 1000 daily online without investment in India.
How to Invest in the Best Index Funds
Step 1 – Log in to Your Mutual Fund Investment Platform
I am using Zerodha Coin as I have an existing account with them. You can check out other best brokers for mutual funds as well.
You can use other platforms like –
- Groww
- Scripbox
- Kuvera
Step 2 – Select the Best Index Fund
Like Nifty 50 index fund, you can also choose the Sensex index funds to invest in Sensex index funds like HDFC Index S&P BSE sensex index fund, thattrack the performance of an underlying BSE Sensex index.
Step 3 – Choose Between Starting a SIP or One-time Lumpsum
SIP is preferred for salaried persons. You can start a SIP with a lower amount of Rs. 100 or Rs. 500 depending on the index fund that you are investing in.
SIP helps you save & invest a fixed amount monthly.
You have the flexibility to change the fixed SIP amount and the investment frequency.
Lumpsum investment is better for a business person who expects a huge chunk of money inflow.
If you are expecting money from the inheritance or profit from the sale of the property then you can use the lumpsum investment route.
If you want to do intraday trading, I would suggest starting investing with Rs 5000 as an initial investment.
Step 4 – Complete the Payment Process
You can read how to invest in mutual funds in the Zerodha guide to understand the detailed step-by-step process of investing in mutual funds.
Final Thoughts
Index funds are a simple and low-cost way to invest in the market and can provide investors with diversified exposure to the market.
Before that, you need to consider your investment goals, risk tolerance, and investment horizon before choosing a fund.
Investing in index funds is a smart and simple way to grow your wealth over the long term.
FAQs
It is a good idea to review your index fund portfolio periodically, at least once a year.
Reviewing your portfolio will help you ensure that your investments align with your current financial goals and risk tolerance.
Index funds are less risky than actively managed funds. However, like all investments, index funds come with risks.
You should consider their risk tolerance before investing in index funds.
Index funds are designed to track the performance of a specific market index, not beat it.
While an index fund can outperform the market, it is not its primary objective.
Yes, many fund houses offer index funds through systematic investment plans (SIPs), which allow investors to invest in small amounts over time.
An index fund seeks to replicate the performance of a specific market index, while an actively managed fund relies on a fund manager’s ability to pick winning stocks and outperform the market.
Index funds can be a suitable investment option for investors with a long-term investment horizon who are looking for diversified exposure to the market at a low cost.
However, investors should consider their investment goals, risk tolerance, and investment horizon before investing in index funds.
