Best Index Funds to Invest in India

Index funds have emerged as a popular investment choice among Indian investors, offering a simple, low-cost way to achieve steady market-linked returns. By mirroring the performance of a specific index, these funds provide diversification and minimize the need for active management. This makes them ideal for both new and experienced investors.

As the demand for passive investment strategies grows, index funds continue to stand out for their simplicity, transparency, and low expense ratios. In this article, we will explore the best index funds to invest in India in 2024, giving valuable insights to help you make informed investing choices.
 

What are Index Funds?

Index funds are a type of mutual fund meant to track the success of a particular market index, such as the Nifty 50 or the Sensex. These funds try to replicate the makeup and results of the underlying index by owning a mix of stocks that match the index. Unlike actively managed funds, index funds aim to match the market's performance instead of trying to beat it, which leads to lower management fees and costs.

Best Performing Index Funds for SIP

Best Index Funds to Invest

Motilal Oswal Nifty Midcap 150 Index Fund - The Motilal Oswal Nifty Midcap 150 Index Fund aims to deliver returns that closely match the performance of the Nifty Midcap 150 Index, subject to tracking errors. 

Motilal Oswal Nasdaq 100 FOF Scheme - This fund aims to generate returns by investing in units of the The Motilal Oswal Nasdaq 100 ETF. It is designed for investors seeking long-term capital appreciation and offers Indian investors exposure to the Nasdaq 100 Index, which comprises 100 of the largest non-financial companies listed on the Nasdaq stock exchange.

Axis Nifty 100 Index Fund: The scheme aims to deliver returns that closely align with the total returns of the NIFTY 100 Index, before expenses, while accounting for tracking errors. It is a long-term wealth creation solution that invests in a selection of stocks from the Nifty 100 Index.

Bandhan Nifty 50 Index Fund: The scheme seeks to replicate the Nifty 50 Index by investing in the same securities in equal proportions. These funds follow a passive investment strategy and have the potential for long-term growth, outpacing inflation over time.

UTI Nifty 50 Index Fund: The scheme aims to invest in the stocks of companies within the Nifty 50 Index, seeking to generate returns that closely mirror the index’s performance through passive investment in equity instruments.

SBI Nifty Index Fund: The scheme is a passively managed index fund that invests in the same stocks as those in the Nifty 50 Index, maintaining the same weightage as in the index.

HDFC Index Fund Nifty 50 Plan: The Scheme seeks to generate returns that are commensurate with the performance of the NIFTY 50 Index, subject to tracking errors.

ICICI Prudential Nifty 50 Index Fund: The scheme aims to closely mirror the performance of the Nifty 50 Index by investing in nearly all the stocks, in proportions that closely match their weightage in the index.

Nippon India Index Nifty 50: The fund follows a passive investment strategy aimed at tracking the performance of the Nifty Next 50 TRI. It seeks to achieve this by investing in the securities that make up the Nifty Next 50 Index, maintaining the same proportion as in the index.

DSP Nifty 50 Index Fund: The scheme aims to generate returns in line with the performance of the NIFTY 50 Index, subject to tracking error, making it ideal for long-term capital gains.

List of Different Types of Index funds to Invest

● Large-cap Index Funds: These funds follow large-cap markets like the Nifty 50 or the Sensex, giving exposure to the biggest and most known companies in the Indian stock market.

● Mid-cap and Small-cap Index Funds: As the name suggests, these funds track indices representing mid-cap and small-cap companies, exposing buyers to possibly higher growth possibilities in these areas.

● Sectoral Index Funds: These funds track the success of specific sectors or businesses, such as banks, information technology, or drugs, allowing investors to gain focused exposure to particular market parts.

● Thematic Index Funds: These funds track indices based on particular themes or investment strategies, such as environmental, social, and governance (ESG) factors, low volatility, or income return.

● Exchange-sold Funds (ETFs): ETFs are index funds sold on stock markets, giving buyers real-time price and liquidity. ETFs can track different indices, including broad market, industry, and foreign index.

“Market Mimicry” - How Does an Index Fund Work?

One of the standout features of index funds is their ability to replicate the performance of the market index they track—this is known as “market mimicry.” This means that investors can tap into the overall growth of the market without needing to pick individual stocks or actively manage their investments. 

Let’s understand this better using a simple example. Imagine a basket that represents the top 50 popular items in a store. If one item, say a type of cereal, makes up 10% of the basket, the fund manager will make sure that the same cereal makes up 10% of their basket too. The rest of the basket will have the same items, in the same amounts, just like the original list of top 50 popular items. This way, the manager is simply copying the contents of the original basket without trying to change anything.

Similarly, when you invest in an index fund, the fund manager uses your money to buy stocks in the same proportions as the underlying index. Essentially, the index fund mirrors the index it tracks, ensuring that the fund’s performance aligns with the market. Index funds offer a diversified portfolio with the potential for long-term growth.

Now, if a company’s weight in the index changes—say, its share of the index increases or decreases—the fund manager will adjust the holdings in the index fund to reflect that change. If a stock is removed from the index and replaced by a new one, the fund manager will sell the stock that’s been removed and buy the new stock, ensuring that the fund continues to mirror the index as closely as possible.

Because index funds are passively managed and don’t require active buying or selling of stocks, their cost structures are significantly lower compared to actively managed funds. This makes index funds one of the most affordable investment options available, especially for long-term investors seeking broad market exposure.

Who Should Invest in Index Funds?

Passively managed index funds are a good choice for investors who want a simple way to invest in the stock market or don’t want to spend time picking top fund managers. Investing in index funds can also be a suitable choice for new investors and risk-averse investors as they closely track a specific market index, reducing exposure to equity-linked risks. On the other hand, if you’re happy with the returns the market generally offers and don’t want to take extra risks for potentially higher returns, index funds are a great option. 

Index funds come with certain limitations, like they may lack flexibility, face tracking errors by managers, and risk underperforming their target index. Deciding to invest in index funds depends largely on factors like the investor's risk appetite, financial goals, and investment strategy. Understanding these features can help assess whether index funds align with your investment needs.
 

How to Choose the Best Index Fund to Invest?

When choosing an index fund to invest in, consider the following factors:

● Investment Objective: Determine your investment goals, such as long-term wealth building, income generation, or portfolio variety, and choose an index fund that fits those objectives.

● Risk Tolerance: Assess your risk appetite and choose an index fund that fits your risk profile. Large-cap index funds are usually viewed as less dangerous than mid-cap or small-cap funds.

● Expense Ratio: Compare the expense ratios of different index funds, as lower fees can majorly affect long-term profits. ETFs generally have lower cost rates compared to standard index funds.

● Tracking Error: Evaluate the fund's ability to closely track the performance of the underlying index by studying its tracking error, which measures the departure from the index's results.

● Fund Manager and Fund House: Consider the name and track record of the fund manager and the fund house, as well as their financial theory and management style.

● Taxation: Understand the tax effects of buying in different types of index funds, as the tax treatment may change based on the fund structure (e.g., mutual fund or ETF).

Taxation on Index Funds

The 2024 budget introduced changes to the capital gains tax structure for equity investments, including index mutual funds. From July 23, 2024, the tax rate on long-term capital gains (LTCG) has increased from 10% to 12.5%, while the short-term capital gains (STCG) tax has risen from 15% to 20%, aiming to adjust the taxation of equity investments.

For capital gains, if index fund units are redeemed within 12 months, the gains are considered short-term and taxed at 20%. Gains from units held for more than 12 months are treated as long-term and taxed at 12.5% on amounts exceeding ₹1,25,000. 
 

Conclusion

As the Indian stock market changes, index funds will likely play an increasingly important part in the financial scene. With their ability to provide broad market exposure, low costs, and the possibility for long-term growth, index funds offer an appealing investment chance for investors in 2024. By carefully considering the various choices available and matching your investment decisions with your financial goals and risk tolerance, you can tap the power of index investing and achieve sustainable returns over the long run.