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Index Funds

An index fund invests in a broad stock market index, Sensex or Nifty. Their portfolio comprises the same stocks as in the Sensex of Nifty in the same proportions. Investors must understand the associated risks before investing.

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List of Index Mutual Funds in 2022

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Fund name
Till Date CAGR
Aditya Birla Sun Life Nifty Next 50 Index Fund (G)

28.921 Cr




UTI Nifty Midcap 150 Quality 50 Index Fund (G)

94.654 Cr




Navi Nifty 50 Index Fund (G)

302.948 Cr




Navi Nifty Next 50 Index Fund (G)

48.288 Cr




Axis Nifty Midcap 50 Index Fund (G)

22.522 Cr




Aditya Birla Sun Life Nifty Midcap 150 Index Fund (G)

66.59 Cr




Aditya Birla Sun Life Nifty 50 Equal Weight Index Fund (G)

109.56 Cr




ICICI Prudential Midcap 150 Index Fund (G)

47.91 Cr




Axis Nifty Smallcap 50 Index Fund (G)

25.04 Cr




HDFC Nifty 100 Index Fund (G)

67.924 Cr




HDFC Nifty 100 Equal Weight Index Fund (G)

78.061 Cr




HDFC NIFTY Next 50 Index Fund (G)

335.292 Cr




ICICI Prudential Smallcap Index Fund (G)

50.312 Cr




Edelweiss Large & Midcap Index Fund (G)

50.923 Cr




Motilal Oswal Nifty 200 Momentum 30 Index Fund (G)

136.041 Cr




UTI Sensex Index Fund (G)

117.534 Cr




HDFC NIFTY50 Equal Weight Index Fund (G)

475.132 Cr




Axis Nifty Next 50 Index Fund (G)

60.377 Cr




IDFC Nifty 100 Index Fund (G)

30.93 Cr




ICICI Prudential Nifty Bank Index Fund (G)

29.979 Cr




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What are Index Funds?

Index funds are mutual funds that have a portfolio constructed to match the index of the market. The returns from these mutual funds match that of the benchmark. These funds have low portfolio turnover, broad market exposure, and low expense ratio. These mutual funds replicate the portfolio of the benchmark, and hence these are also known as passive funds. Also, these funds are best for investors investing for the long term (10+ years) and for those who do not want to monitor their portfolio constantly.

What is a stock market index?

The stock market index is a measure to show the changes or movements in the stock market. An index is created to monitor the movements in the market. A similar type of security is clubbed together. The selection of securities is based on the type of industry, market share of each security, performance of the security in the market, etc. The examples of a stock market index are Sensex, Nifty 50, etc.

The value of the index is the value of the securities, which are clubbed in the stock index. Hence, the change in the value of the security has a direct impact on the value of the index.

An index fund is a type of mutual fund that replicates a stock market index. These funds replicate the composition of a benchmark and invest in the same securities and the amount as well.

For example, Sensex comprises three securities. 

Tech Mahindra Ltd – 30% of total Sensex value

Yes Bank Ltd – 40% of total Sensex value

Infosys Ltd – 30 % of total Sensex value

An index mutual fund will also invest in the above securities and in the same weight. Its portfolio will comprise of the following security

Tech Mahindra Ltd – 30% of total Sensex value

Yes Bank Ltd – 40% of total Sensex value

Infosys Ltd – 30 % of total Sensex value

Hence, by replicating the stock market index, these mutual funds aim to achieve the same returns as that of the benchmark.

How do Index Funds Work?

Index Funds track a particular index or benchmark. An index defines a market segment. In other words, securities that belong to the same segment are grouped and form an index. These segments are either equity-oriented instruments like stocks or bond market instruments. For example, an Index fund tracking NIFTY will have the same 50 stocks that NIFTY comprises off and in the same proportion. These funds track a particular benchmark, hence fall under the passively managed funds. The fund manager doesn’t pick the stocks and just mimics the benchmark. The fund management team aims to maintain the composition of the underlying benchmark.

Returns from these funds are more or less equal to that of the benchmark. However, there would be a slight difference in the performance and this is known as the tracking error. The best fund would be the one with the least tracking error. Also, these funds have a low expense ratio compared to actively managed funds. Also, all future inflows are invested in the same proportion of the underlying index.

Index Mutual Fund in India can be of two types Index Mutual Funds and Index Exchange Traded Funds. Index Mutual Fund is offered directly by the fund house. While Index Exchange Traded Funds are traded on the stock exchange.

Points to consider before investing in passive mutual funds in India

  • Investment Period: Index funds are suitable for investors who can stay invested in the fund for a longer period. Since these funds replicate a benchmark, it may go through many market fluctuations in the short term. These fluctuations will average out in the long term. Therefore, these funds may prove to be a good option for wealth creation and appreciation in the long term.
  • Cost of investment: Index funds are passively managed funds. Since an this fund is a proxy of a stock market index, the fund manager does not actively monitor the portfolio. Due to this reason, the cost of managing the fund is low. Hence the expense ratio of these funds is lower when compared to actively managed funds. These passive funds will be charged 0.30% to 0.50% of the total fund, while any other actively managed fund will be charged 1% to 2% of the fund value.
  • Diversification of portfolio: Index funds are made up of securities that a benchmark holds for its portfolio. The portfolio of an index fund consists of securities of top companies from different sectors. Hence this diversification in the portfolio allows the investor to manage the risk of being overinvested in a particular security or sector.

Tax on index mutual fund in India

The redemption of units of index funds is taxable as a capital gain. Also, the tax rate depends on the holding period of the units of the fund.

  • Short Term Capital Gains: STCG arises when the period of holding of the units is less than 12 months. The tax rate is 15% on the amount of gain earned.
  • Long Term Capital Gains: LTCG arises when the period of holding of the units is more than 12 months. The tax rate is 10% without the benefit of indexation on the amount of gain earned.

Who should invest in an Index Fund?

Index funds aim to match the performance of a benchmark. A stock market index benefits an investor in the long term. Hence, these funds best suit investors who are looking to invest for the long term, ideally for retirement. These funds are also an ideal option for investors who prefer earning foreseeable returns. Considering these funds do not have a lot of risk in them, therefore is a perfect option for risk-averse investors looking for some equity exposure. Also, index funds are passively managed funds that do not require monitoring of the portfolio.

On the other hand, an actively managed fund’s portfolio is based on the fund manager’s predictions and involves an element of risk. Actively managed funds require continuous monitoring of the portfolio. Hence, index funds also suit investors who wish to invest and forget about the investment for a long time. The returns from index funds match that of the benchmark, and investors cannot expect higher returns than the benchmark. Hence, for investors looking for higher returns, actively managed funds can be preferred.

Check Out: Best Index funds to Invest

How does investing in index funds work?

Investing in index mutual funds in India can be done directly or through an agent. Investors can invest online through the direct method by logging on to the fund houses’ website and investing in the fund. On the other hand, they can invest through offline mode by visiting the nearest branch of the fund house. Investing through an intermediary can be done both online and offline.

There are multiple online platforms to invest in these funds, and one of them is Scripbox. Scripbox allows investors to invest the best funds carefully picked after thorough research using their robotic technology. You can invest in Scripbox recommended best index mutual funds in India by following the below-mentioned steps:

  1. Login to Scripbox
  2. Click on ‘ Let’s Get Started’
  3. Begin your investment journey with ‘Build Wealth.’
  4. Select the mode of investment i.e., monthly SIP, one time or STP
  5. Enter the amount of investment
  6. Based on the amount of investment, the recommended funds will be provided. You can change the funds and the distribution of the amount
  7. Select the payment mode and proceed toward the payment

Explore ETF vs Index Fund

Frequently Asked Questions

Can you lose money in an index fund?

Index Funds are passively managed funds that replicate the portfolio of the benchmark based on a diversified portfolio. The risk of losing money in an index funds is relatively low. This is because index funds are highly diversified mirroring the underlying stock index. The top companies form the index. Such companies have a higher growth and revenue potential. It is very unlikely that the market value such companies would at once fall to zero or nil. Furthermore, an index fund is designed to be held for a long duration that may extend to 10 years in order to avoid short term market fluctuation and losing money on the investment.

Is it worth investing in index funds?

Yes, it is worth investing in Index Funds for investors who are seeking moderate returns without being exposed to a very high level of volatility. Index funds are suitable for investors wish to invest in a stock market index but do not possess the time or knowledge to manage the changing index and its weights for their investment. The index fund replicates an index and thereby replaces an investor’s efforts of continuously monitoring and revisiting portfolio.

How do you get money from index funds?

You get money from index funds in form of returns through passive investment. The fund replicates and tracks a particular stock index or benchmark comprising of large cap companies across different industries. In a way you earn returns similar to the movement of the stock index on the stock market. This is how you earn money from index funds. The low risk comes from the portfolio diversification of the selected benchmark.

How do you create an index fund?

Index funds are already created by the fund managers and investors need only to select their most appropriate one. Index funds are created by replicating the stock market index. It replicates the types of companies, their composition, proportion, weightage. Hence, the stock holding or asset allocation of an index fund is actually a proxy of the stock market index.
The fund managers work on maintaining the composition of the stock market index for a well-diversified investment portfolio to secure returns to the fund investors.

How do I choose an index fund?

While choosing an index fun you need to consider a few factors. To begin with first of all make sure that index funds suit your investment goals. Index funds are suitable for investors investors who are looking to invest for the long term, ideally for retirement. These funds are also an ideal option for investors who prefer earning foreseeable returns. It is a perfect option for risk-averse investors looking for some equity exposure. The next step is to select the stock market index in which you wish to invest. Now, to select the index fund that benchmarks to the stock market index chosen by you. Further, you must consider the fund manager’s track record, historical returns, consistency of returns, relative size i.e., AUM, etc.

Do you pay taxes on index funds?

Index Funds are taxable upon redemption as a capital gain. Since an index fund is an equity-oriented mutual fund the period of holding is 12 months. LTCG arises if you hold the units for more than 12 months. Any long term capital gain up to Rs 1 lakh is tax exempt. LTCG is excess of Rs 1 lakh is taxable at a rate of 10%. STCG arises if the units are held for less than 12 months. The rate of tax for STCG is 15%.

How long should you hold index funds?

Index Funds are more suitable for long term investments that might be extended for 10 years or longer. This was you can aim for capital appreciation in the long term and avoid volatility in the short term.

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