Best Index Funds in India: How to Invest in 2024

What is an Index Fund in India?

An index fund is a type of mutual fund that is managed pasffsively. In simple terms, it tries to copy the performance of a specific market index by holding the same stocks in the same proportion. 

Unlike actively managed funds, where a manager decides which stocks to buy or sell, these funds simply follow a particular index without making changes. This makes them a simpler and often cheaper way to invest in the stock market.

How Does an Index Fund Work?

1. Tracking a Market Index

An index fund mimics the performance of a particular index. For instance, if the index is composed of 50 stocks (like Nifty 50), the fund will invest in those 50 stocks in the same weightage. Some broader indices such as the Nifty 500 may include around 500 stocks across various market sectors.

2. Types of Assets

These funds can invest in various assets, including stocks and bonds. They make sure to include all the stocks that are part of the index they are following.

3. Passive Management

Unlike actively managed funds, which try to beat the market, index funds are passively managed. Their goal is to match the performance of the index. 

When you invest in index funds India, the fund manager uses your money to invest in stocks just like they are listed in the index.

4. Proportional Investments

For example, consider a NIFTY Index Fund that tracks the Nifty 50. If Reliance Industries Ltd. (RIL) makes up 8.64% of the index, the fund will also hold RIL in that same weight — 7.3% of its total investments. This approach ensures that the fund closely mirrors the performance of the index.

5. Adjustments to Holdings

If the percentage of any stock changes in the index, the fund manager will adjust the fund’s holdings accordingly. For instance, if a stock is taken out of the index and a new stock is added, the manager will sell the old stock and buy the new one in the same proportion as it appears in the index.

6. Cost Efficiency

Since index funds don’t have a team of managers making lots of buying and selling decisions, their costs are much lower. This makes index funds one of the cheapest ways to invest in the stock market, allowing people to invest without spending too much money.

Why Should You Invest in Index Funds?

1. Low Expense Ratios and Cost Efficiency: Best index funds in India are a cost-effective choice for investors due to their low expense ratios. This is due to their passive management style, which reduces management fees.
2. Broad Market Exposure and Diversification:These funds provide diversification by tracking a stock index — this means your investment is spread across many companies, sectors, and industries. It can be quite useful if you wish to reduce risk while investing.
3. Consistent Performance and Long-Term Growth: Index funds India aim to mimic the performance of a chosen index, allowing you to participate in the overall upward trend of the market. This can lead to steady growth over time.
   For instance, over the last 5 years, Nifty 50 has demonstrated a compound annual growth rate (CAGR) of around 17%. So if you had invested in a Nifty 50 index fund for the last 5 years, your money today would have effectively become 2.2x in value! 

Top 10 Index Funds in India 

Here’s a detailed comparison of the best Index funds in India to help you make an informed decision —

• Motilal Oswal Nifty Midcap 150 Index Fund

This index fund in India is for long-term investors looking to invest in Indian midcap companies. Nifty 150 Index is an important indicator for investors looking to gain exposure to a broad spectrum of the Indian market while benefiting from the stability of established companies and the growth potential of mid-sized firms.

This Nifty Midcap 150 Index includes a total of 150 companies. Some of the top holdings in this fund are Suzlon Energy Limited, Max Healthcare Institute Limited, and The Indian Hotels Company Limited. This diversified approach allows you to gain exposure to a broad spectrum of midcap stocks in India.

• SBI Nifty Next 50 Index Fund 

The SBI Nifty Next 50 Index Fund is an equity fund that began in May 2021 and is managed by Raviprakash Sharma. This fund diversifies its investments across various sectors, including Financial Services, Industrial, Consumer Cyclical, and more, with top holdings in companies like Trent Ltd., Bharat Electronics Ltd., and Hindustan Aeronautics Ltd.

The investment objective of this fund, one of the best index funds in India, is to achieve returns that closely align with the total returns of the Nifty Next 50 Index. To achieve this, the fund adopts a passive investment strategy, investing in stocks that make up the Nifty Next 50 Index in similar proportions. 

• ICICI Prudential Nifty 50 Index Fund

The ICICI Prudential Nifty 50 Index Fund is a large-cap index mutual fund that has been operational since January 2013. By making investments in almost all of the index's firms in comparable amounts, this index fund in India aims to closely mimic the performance of the Nifty 50 Index.

This fund primarily invests in sectors such as Financial, Technology, Energy, and Consumer Staples. Its performance in controlling losses during market downturns is generally considered good. The fund's top five holdings include major companies like HDFC Bank Ltd., Reliance Industries Ltd., ICICI Bank Ltd., Infosys Ltd., and ITC Ltd.

• Aditya Birla Sun Life Nifty Midcap 150 Index Fund 

Since its inception in April 2021, the fund primarily invests in sectors such as Industrial, Financial Services, and Consumer Cyclical. Its top holdings include Suzlon Energy Ltd, Max Healthcare Institute Ltd, and Indian Hotels Co Ltd. With around ₹273 crore in assets, this fund aims for long-term growth. 

By investing in this passive index fund in India, you can invest in mid-cap companies without having to pick stocks yourself. As these mid-cap companies grow, their stock prices may increase, giving you a chance to build wealth over time. Plus, this approach offers diversification and lower costs compared to active investing.

• Kotak Nifty Next 50 Index Fund 

Established in March 2021 and managed by Devender Singhal, the fund's investments are diversified across various sectors, including Financial Services, Industrial, and Consumer Cyclical. Its top holdings are in companies such as Trent Ltd, Bharat Electronics Ltd, and Hindustan Aeronautics Ltd.

This index fund India aims to mirror the Nifty Next 50 Index, providing returns that match the index's performance while managing tracking errors. As a well-diversified large-cap fund, it has the potential for good returns with lower risk. It’s a great choice for investors looking for long-term growth that reflects the performance of the Nifty Next 50 Index.

• HDFC Index Fund Nifty 50 Plan

By investing in this index fund in India, you can enjoy several attractive benefits. Firstly, it provides diversified exposure to the largest 50 companies included in the Nifty 50 Index. These companies are regarded as blue-chip stocks and are leaders in their respective industries. 

Additionally, it tracks the Nifty 50 index — investors can easily understand and engage with the overall performance of India’s leading companies. This, combined with the reputation of HDFC, make it one of the best choices.

This fund is particularly suitable for investors who are new to equity investing and seek diversified exposure to large-cap companies in India. It’s also for those who desire a low-cost investment option and are looking for a long-term strategy to build wealth over time.

• Axis Nifty 100 Index Fund

This index fund aims to track the Nifty 100 Index by investing in a diverse range of its stocks while managing tracking errors.

Launched in September 2019, this index fund in India is a low-cost passive investment vehicle that offers an efficient way to invest in large-cap stocks with an expense ratio of just 0.21%. This fee is competitive compared to other large-cap index funds, making it an affordable option for investors.

The fund primarily invests in sectors such as Financials, Energy, Technology, Consumer Staples, and Automobiles. Its top five holdings include leading companies like HDFC Bank Ltd., Reliance Industries Ltd., ICICI Bank Ltd., Infosys Ltd., and ITC Ltd.

• UTI Nifty200 Momentum 30 Index Fund Direct-Growth

Started in March 2021, this index fund in India is managed by Sharwan Kumar Goyal. It aims to provide long-term growth that could potentially outpace inflation.

The fund invests primarily in sectors such as Consumer Cyclical, Industrial, Financial Services, Utilities, Communication, Energy, Basic Materials, Technology, Health, and Real Estate. 

Its top holdings include prominent companies like Trent Ltd, Tata Motors Ltd, NTPC Ltd, Bajaj Auto Ltd, and Bharti Airtel Ltd.

• Nippon India Nifty Smallcap 250 Index Fund 

Launched in October 2020, this fund is managed by Mehul Dama and aims to provide investors with long-term growth potential. This fund focuses on smaller companies, which have higher growth potential but tend to be more volatile than larger company funds. While you may see higher long-term returns, be prepared for larger price swings along the way.

In terms of holdings, this fund diversifies its investments across several sectors. Some of its top holdings include Crompton Greaves Consumer Electricals Ltd, Multi Commodity Exchange of India Ltd, Glenmark Pharmaceuticals Ltd, Central Depository Services (India) Ltd, and Exide Industries Ltd.

• Mirae Asset Equity Allocator FoF Direct - Growth

Mirae Asset Equity Allocator FoF is an ‘equity fund of funds’ from Mirae Asset Mutual Fund launched in September 2020. What’s notable about this fund is that instead of investing in stocks, it invests in ETFs (exchange-traded funds).

While the fund’s ability to deliver consistent returns is in line with its peers, it includes a little high risk. The majority of its investments are in unclassified sectors, and it has less exposure to these sectors compared to other funds in its category. 

Its top holdings include the Mirae Asset Nifty 50 ETF - Growth, Mirae Asset Nifty Midcap 150 ETF - Growth, and Mirae Asset Nifty Next 50 ETF - Growth.

Factors to Consider Before Investing in Index Funds in India

1. Expense Ratio

The expense ratio is a small fee based on the fund's total assets, covering management services. 

One of the main advantages of index funds India is their low expense ratio, as they don't require extensive research or active stock picking. Nevertheless, it’s a good idea to check it out before investing.

2. Risks and Returns

Index funds are generally less volatile than actively managed funds, resulting in lower risks. They tend to perform well during market rallies. 

With that said, as per some experts, it’s advisable to consider switching to actively managed funds during market downturns. A balanced portfolio that includes both index funds and actively managed funds can be beneficial. 

3. Tax Considerations

As equity funds, index funds are subject to dividend distribution tax and capital gains tax. Be aware of these tax implications when investing.

How to Invest in Index Funds in India?

By following the below steps, you can successfully invest in this index funds in India list while ensuring compliance with local regulations —

Step 1: Set Up an Account

• As an NRI, you must open a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account. This is because mutual fund companies in India cannot accept investments in foreign currency.
• Once your account is active, you can invest either directly or through a Power of Attorney (PoA) if someone else is managing your investments.

Step 2: Get Your KYC Done

• Completing the KYC process is mandatory before investing.
• Required documents include a copy of your passport (only relevant pages), date of birth, a recent photo, and proof of current residence.
• Some fund houses may require in-person verification.

Step 3: How to Sell/Buy Funds?

• As an NRI, you can redeem your mutual fund investments by following the redemption procedures outlined by the respective fund houses.
• After redemption, the fund house will credit the total amount (investment plus gains) to your NRE or NRO bank account after deducting applicable taxes.
• Alternatively, they can issue a cheque for the redemption amount.

Frequently Asked Questions