Best Index Funds to Invest in 2020
Last Updated: 13th December 2022 - 12:23 pm
Did you know that between 1979 and 2019, the Sensex moved from 100 to 42,000? In other words, your investment has compounded annually at 16.3% for 40 years. This is just the capital appreciation part. If you add the average dividend yield of 1.5%, the Sensex has compounded at 17.8% annually for the last 40 years. But, how do you invest in the Sensex?
That is where an index fund comes in handy
An index fund is a mutual fund that mirrors the portfolio of the index. Unlike an active fund, there is no stock selection. When you buy an index fund, just look at which index the fund is benchmarked to? The portfolio of the fund will mirror the stocks in the index in approximately the same proportion. You can buy and sell index funds from your existing mutual funds online platform. Index funds offer you a smart and efficient method of participating in the stock market without taking on too much of stock specific risk.
Best performing index funds for 2020
As a mutual fund investor, you have a wide choice of index funds. Every large fund house has an index fund of its own and there are funds pegged to different indices. How do you make a choice? The first rule is to stick to diversified indices like the Sensex or the Nifty. Secondly, since we do not know about future returns, we can use past returns on index funds to select the best fund to invest in. Here is the list of best index funds ranked on historical returns over last 5 years. We have only considered the growth option of Regular Plans of these index funds.
| Fund Name | 1-Year Returns | 3-Year Returns | 5-Year Returns |
| HDFC Index Sensex Fund (G) | 15.813% | 13.629% | 8.133% |
| ICICI Pru Nifty Next 50 Fund (G) | 11.686% | 5.827% | 8.011% |
| Tata Index Fund Sensex (G) | 15.584% | 13.387% | 7.567% |
| UTI Nifty Index Fund (G) | 13.666% | 11.914% | 7.488% |
| HDFC Index Nifty 50 (G) | 13.379% | 11.775% | 7.406% |
| Data Source: Morningstar | Returns calculated as on 20th Feb 2020 | |||
How to select the best index fund from the list?
There is a risk in taking a futuristic view based on past data but here are five basic rules you can follow to zero in on the best index fund.
- Look for consistency of returns. If you are wondering why we are looking at 1-year returns for index funds (these are long term products), the idea is to check for consistency. The returns across various time frames should be consistent with the group. That makes the index fund more predictable.
- Index funds do not have to spend on fund managers to find multi-baggers. Indexing is a passive approach and hence the lower cost gets passed on to you in the form of lower total expense ratio (TER). That helps to enhance returns. You can even opt for Direct Plans to reduce costs further.
- One unique parameter you must consider in index funds is the tracking error. It measures the extent to which the index fund deviates from the index. Normally, an index fund should have low tracking error.
- Given a choice, prefer the index fund with the larger AUM as small AUMs can come in the way of effectively replicating the index.
- Take a long term view when you invest in an index fund. Markets tend to be cyclical and hence you must keep an investment horizon of at least 8-10 years for an index fund.
Index funds save you cost and the risk of stock selection. A bit of homework on your part can leave you with a satisfying and profitable journey investing in index funds.
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5paisa Research Team
Sachin Gupta
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