Written by CA Pankaj Chhabra – 
& Megha Jain –
Index funds are investment vehicles that offer a simple and cost-effective way to gain exposure to a particular stock market index.
They aim to track the performance of a specific index by investing in a representative sample of the underlying stocks.
Whether you are a beginner or an experienced investor, index funds can be a valuable addition to your investment portfolio. By offering broad market exposure, low expenses and simplicity they can help achieve your financial goals and build wealth over the long-term.
Related: Equity Funds
WHAT ARE INDEX FUNDS?
Index funds are a type of mutual fund or exchange traded fund (ETF) that mirrors the performance of a specific stock market index, such as NSE Nifty, BSE Sensex, etc.
These are passively managed funds which means that the fund manager simply copies the index while building the fund’s portfolio and tries to maintain the portfolio in sync with it’s index at all times.
Index funds endeavor to offer returns comparable to the index that they track.
TOP INDEX MUTUAL FUNDS
Here are some of the best Index Funds to consider for your portfolio:
| Ranking | Mutual funds | 3 year return | 5 year return | ||
| 1 | Aditya Birla Sun Life Nifty 50 Index Fund | 13.93% | 10.46% | ||
| 2 | Axis Nifty 100 Index Fund – Regular Plan | 13.22% | – | ||
| 3 | DSP Nifty 50 Index Fund – Reg – Growth | 14.04% | – | ||
| 4 | HDFC Index Fund – S&P BSE Sensex Plan | 13.74% | 11.51% | ||
| 5 | HDFC Index Fund-NIFTY 50 Plan | 14.08% | 10.89% | ||
| 6 | ICICI Prudential Nifty Index Fund – Reg – Growth | 14.07% | 10.66% | ||
| 7 | Motilal Oswal Nifty 50 Index Fund – Regular Plan | 14.18% | – | ||
| 8 | SBI Nifty Index Fund – Growth | 13.79% | 10.52% | ||
| 9 | Tata Nifty 50 Index Fund – Regular Plan | 13.86% | 10.68% | ||
| 10 | Tata S&P BSE Sensex Index Fund – Regular Plan | 13.13% | 11.11% | ||
WHO SHOULD INVEST IN INDEX FUNDS?
- Investors seeking predictable returns with low risk.
Since Index Funds track a market index, returns are usually similar to those offered by the index.
Hence, investors who want to invest in equity, but prefer predictable returns without taking a lot of risk prefer these funds.
- Investors seeking low-cost options.
As these funds are passively managed, they typically have lower expense ratios compared to actively managed funds. This makes them a cost-effective option for individuals who are looking to minimize investment fees.
- Long-term investors.
Investing in these funds is suitable for long-term investors with an investment horizon of at least 5 years, as these funds might experience fluctuations in the short-term but it averages out over a longer term.
Related: Returns Calculator
FACTORS TO BE CONSIDERED WHILE INVESTING IN INDEX FUNDS
While Index funds can be a valuable addition to an investment portfolio, it is important to remember that they are not a guarantee of positive returns and are subject to market risks.
As with any investment, it is important to carefully consider your investment goals, risk tolerance, and overall financial situation before investing in index funds.
- Investment goals
Investors need to identify their investment goals and determine how index funds fits into their overall investment strategy. Because the returns from these funds will not be far greater than those offered by the index and are usually suitable for long-term investment horizon.
- Risks and returns
Since index funds track a market index, they are less volatile than the actively managed equity funds.
However, index funds tend to lose their value during a market downturn. Therefore, it is usually recommended to switch your investments to actively managed equity funds during a market slump.
It is advised to have a healthy mix of actively managed funds and index funds in your portfolio.
- Expense ratio
Expense ratio is the fee charged by the AMCs for managing the fund which includes sales, marketing, administrative expenses, transaction costs etc. as a percentage of the fund’s NAV.
Index funds usually have an expense ratio much lower than actively managed funds. But it is still important to consider the expense ratio as this will impact your returns over time.
Look for funds with low expense ratios to minimize the impact of investment fees.
Related: Retirement Planning
HOW TO INVEST IN INDEX FUNDS ONLINE?
- STEP 1- Download the SPA Capital App (Available on Android & Apple Store)
- STEP 2- Create your profile
- STEP 3- Select any Small Cap fund from the list of Funds
- STEP 4- Choose between SIP or Lump sum mode
- STEP 5- Complete the payment process
ADVANTAGES OF INVESTING IN INDEX FUNDS
- Cost-effective
As index funds mimics the underlying benchmark, there is no need for an efficient team of research analyst to help fund mangers pick the right fund.
This leads to low expense ratios as compared to actively managed funds, which can help increase returns over time.
- Exposure to broader market
Index funds offer broad market exposure, enabling investors to benefit from the overall performance of a particular stock market index.
- Easier to manage
Unlike actively managed funds, index funds do not require a fund manager to make investment decisions. A fund manager just needs to rebalance the portfolio periodically.
Related: Taxation of Mutual Funds
Related: Financial Awareness
