Index funds have gained popularity in the world of investing, offering a simple and effective way for individuals to participate in the stock market. There are funds that invest in a broader market index like Sensex or Nifty. Index funds replicate the risk and return of the market. In this article, explore some of the best index funds to invest in India.
Index funds are those which are not actively but passively managed by the portfolio managers. If an investor invests in an index fund, the maximum return he can receive is the market return. This return is lesser than the market return because of additional costs involved in investing.
How do Index Funds Work?
Consider an index fund that follows the NSE’s Nifty Index. There will be 50 stocks in this fund’s portfolio, all of which will be distributed in the same way. The index fund makes sure to invest in each and every security that the index monitors.
A passively managed index fund attempts to replicate the returns the underlying index provides, whereas an actively managed mutual fund strives to surpass its underlying benchmark. The low expense ratio of an index fund is one of its main unique selling points (USPs). The expense ratio is a small portion of the fund’s total assets that the fund house charges for fund management services.
How are Index Funds Different from ETFs?
An exchange-traded fund (ETF) may be traded (bought and sold) easily in the stock market, while index funds can only be traded at the set price point at the end of the trading day. Since ETFs trade like shares of stock on exchanges, they may be easier for retail investors to access and trade. Furthermore, they often charge lower fees and are more tax efficient.
What are the Pros and Cons of Index Funds?
| Pros | Cons |
| Easy diversification | Cannot outperform the market |
| Little research/knowledge necessary | Lower potential returns |
| Reduced risk compared to actively managed funds | Little protection from the downside (particularly during bear markets) |
| Lower costs compared to actively managed funds | No control over fund composition |
Which are the Best Index Funds to Invest in India?
| S. No. | Index Funds | 3-Year CAGR |
| 1 | Motilal Oswal Nifty Bank Index Fund Direct-Growth | 25.94% |
| 2 | UTI Nifty Next 50 Index Fund Direct-Growth | 28.64% |
| 3 | Nippon India Index S&P BSE Fund Sensex Plan -Direct Plan – Growth Plan | 23.08% |
| 4 | Motilal Oswal Nifty Smallcap 250 Index Fund Direct-Growth | 36.51% |
| 5 | UTI Nifty Next 50 Index Fund Direct Growth | 19.42% |
1. Motilal Oswal Nifty Bank Index Fund Direct-Growth
- Motilal Oswal Nifty Bank Index Fund Direct Growth has outperformed all other funds in its category during the past three years. It gave CAGR returns of 25.94% over the last 3 years.
- The index fund has assets under management (AUM) of ₹403 crores. AUM refers to the current market value of the funds that the mutual fund is managing.
- The expense ratio for Motilal Oswal Nifty Bank Index Fund Direct Growth is comparatively low at 0.33%
- This index fund saw a 23.7% increase in AUM during the past three months, going from ₹326.48 crore to ₹403.77 crore.
2. DSP Nifty 50 Equal Weight Index Fund Direct Growth
- DSP Nifty 50 Equal Weight Index Fund Direct Growth has given a CAGR of 28.64% in the last three years.
- It has a low expense ratio of 0.4%.
- This is an equity index fund with NIFTY 50 Equal Weight TRI as its benchmark. So an equal amount of your money is invested in the stocks of each company that makes up the index.
- Over the last 1 month, DSP Nifty 50 Equal Weight Index Fund Direct Growth has experienced a 15.2% growth in AUM, moving from Rs 500.1 crore to Rs 576.19 crore.
3. Nippon India Index Fund S&P BSE Sensex Plan Direct Growth
- Nippon India Index Fund S&P BSE Sensex Plan Direct Growth has given a CAGR of 23.08% over the last three years.
- It has one of the lowest expense ratios in the category (index funds) at 0.15%.
- Nippon India Index S&P BSE Fund Sensex Plan – Direct Plan – Growth Plan saw a 22.1% increase in AUM during the past three months, going from ₹367.4 crore to ₹448.45 crore.
4. Motilal Oswal Nifty Smallcap 250 Index Fund Direct-Growth
- In the last 3 years, Motilal Oswal Nifty Smallcap 250 Index Fund Direct Growth has outperformed all funds in its category giving a CAGR of 36.51%.
- The expense ratio for this index fund stands at 0.36%.
- Motilal Oswal Nifty Smallcap 250 Index Fund Direct Growth saw a 7% increase in AUM during the past month, going from ₹315.36 crore to ₹337.35 crore.
5. UTI Nifty Next 50 Index Fund Direct Growth
- The UTI Nifty Next 50 Index Fund Direct Growth has given a CAGR of 19.42% over the last 3 years.
- The expense ratio for this index fund is 0.33%.
- Over the last 3 months, UTI Nifty Next 50 Index Fund Direct Growth has experienced a 17.8% growth in AUM moving from ₹1,920 crore to ₹2,260 crore.
Which are the Sector-Specific Index Funds in India?
The objective of sector-based funds is to make investments in companies operating in the same sector or industry. For instance, there are index funds for the banking, IT, pharma, infrastructure, and consumer goods sectors. Typically, these sectoral funds serve broader categories. However, there are index funds with considerably more narrow and specific goals. A PSU bank-only or a private bank-only index fund is an option for investors, whereas a banking sector index fund is focused on the larger banking category.
A few good examples of best sector-specific index funds to invest in would include Aditya Birla Sun Life Banking ETF, ICICI Prudential Bank ETF, Axis Banking ETF in the banking sector, Axis Healthcare ETF, ICICI Prudential Healthcare ETF in the pharma sector, and Kotak IT ETF, SBI-ETF IT in the technology sector.
Benefits of Sector-Specific Investments
- Targeted Exposure: Investing in specific sectors allows you to focus on industries you believe will perform well, potentially leading to higher returns.
- Expertise and Knowledge: Utilize your understanding of a particular sector to make informed investment decisions and spot opportunities others may miss.
- Diversification within a theme: Investing in sectors related to a specific trend or theme (like renewable energy) allows you to diversify while capitalizing on growth in that area.
Risks of Sector-Specific Investments
- Concentrated Risk: Putting all your investments in one sector increases vulnerability to industry-specific challenges or downturns, potentially resulting in significant losses.
- Volatility: Sector-specific investments tend to be more volatile and sensitive to sector-specific factors.
- Limited Diversification: Overemphasizing a single sector may leave you exposed to risks and missed opportunities from other industries.
- Regulatory and Legislative Risks: Changes in regulations or laws specific to a sector can impact its performance and profitability.
Should You Choose an Index Fund?
Since Index Funds track a market index, their returns closely resemble those of the index. As a result, these funds are preferred by investors who desire consistent returns and wish to engage in the equity markets without taking on too many risks. In an actively managed fund, the portfolio’s composition is altered depending on the fund manager’s prediction of the potential performance of the underlying securities. This increases the portfolio’s level of risk. Such risks are eliminated by the passive management of index funds. The returns will not, however, be significantly higher than those provided by the index. The best choice for investors looking for greater returns is actively managed equity funds.
Disclaimer: The index funds mentioned in the article are solely for educational purposes. Please do your own research before investing.