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Best Index Funds in India

Index funds are good investments for those who can't be bothered about the stock market but still want to profit from its rise.

As the Indian economy grows so do large corporates. The shares of the biggest companies in India trade on the stock market. They are also part of the benchmark index. In India these are the BSE Sensex and NSE Nifty. The Sensex comprises of 30 stocks and the Nifty comprises of 50 stocks.

Index funds are designed to closely track these benchmark indices. These funds don't actively manage their portfolios. Instead they invest in the Sensex/Nifty stocks in the same proportion as the stocks' weightage in the index.

This way, index funds passively track the benchmark indices in the stock market. Thus, if the index rises or falls by 1% in a day, the index fund should also rise or fall by 1% in a day. If the index doubles over time. The index fund's value i.e. its NAV will also double.

Index funds are highly popular in the financial world due to their simplicity and passivity. Investors don't have to worry about the fund's performance as they know the fund will deliver a return similar to the index over time.

Another advantage of index funds is their low fees. These funds don't buy and sell stocks actively. The fund's activity is limited to buying and holding the same portfolio of stocks, in the same proportion, as the index it's tracking.

Thus, these funds don't require much management. Thus the fees to manage these funds are much lower than that of active funds. This ensure the overall expense ratio of an index fund is much lower than that of an active fund.

This ensures that a larger percentage of investors money remans in the fund to compound over time, as opposed to being sucked out due to high fees. This results in higher wealth creation in the long term.

Index funds were not popular in India for many years because many active funds were able to outperform the market. But over time, outperforming the market became very difficult and these days most active mutual funds struggle to consistently beat the market.

This has made index funds popular. Investors are constantly looking for the best index funds, the ones with lowest expense ratios, etc.

It's important to understand that index funds can't outperform each other too much. They are all invested in the same stocks in the same proportion. It's usually the expense ratio that makes the difference in the long term. But there's not much difference in the short term.

Best Index Funds in India

Using criteria like longevity, expense ratio, and market reputation, here is a list of asset management companies (AMCs) which manage the best index funds.

  • HDFC Mutual Fund
  • ICICI Prudential Mutual Fund
  • IDFC Mutual Fund
  • Nippon India Mutual Fund
  • Tata Mutual Fund

Selecting either the Sensex or Nifty fund of these AMCs won't impact the overall long-term returns.

Please note investing via the direct plan, i.e. online from the fund directly, will reduce the expense ratio significantly.

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