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Overview
Index mutual funds are passive investment schemes designed to track the performance of a specified market index rather than actively selecting stocks with the goal of beating it.
An equity index fund may track benchmarks such as a broad-market, market-cap, sector, or strategy-based equity index. Its portfolio generally mirrors the securities and weights of the chosen benchmark as closely as practical.
The goal is usually to deliver returns close to the underlying index before expenses and tracking differences, not to outperform it through active stock selection.
Explained
An index mutual fund is a passive mutual fund that follows a specified index.
Instead of asking a fund manager to decide which stocks appear most attractive, the scheme generally invests according to the constituents and methodology of its benchmark.
For example, if a stock represents a particular weight in the tracked index, an index fund may maintain a similar portfolio weight, subject to permitted operational differences.
SEBI's current mutual fund categorisation framework classifies Index Funds and ETFs under Other Schemes rather than the actively managed equity categories.
Explained
An index fund starts with a defined benchmark.
The fund then constructs a portfolio intended to replicate or closely track that benchmark.
When the index provider changes constituents or weights, the fund may rebalance its portfolio accordingly.
Suppose an index contains 50 companies. If one company represents 8% of the index, the fund will generally seek exposure close to that weight.
Investors receive mutual fund units based on the scheme's applicable Net Asset Value, or NAV.
The NAV changes as the value of the underlying securities changes.
Tracking error indicates how closely a fund follows its benchmark.
An index fund may not produce exactly the same return as the index because of:
A smaller tracking difference is generally preferable when comparing funds tracking the same benchmark, although it should not be the only factor considered.
Suitability
Index mutual funds may suit investors who:
Suitability depends heavily on what the fund tracks.
A broad-market equity index fund and a sector-specific index fund can have very different risk levels.
Advantages
The portfolio follows a predefined index methodology rather than relying primarily on discretionary security selection. This makes the investment strategy relatively easy to understand.
Broad-market index funds may provide exposure to many companies through a single investment. The degree of diversification depends on the chosen index.
Passive funds do not require the same level of ongoing stock selection as active funds. This can contribute to lower costs in many cases, although investors should compare actual expense ratios rather than assuming every index fund is inexpensive.
The fund's portfolio is determined largely by the underlying index. Performance therefore depends less on whether an active manager successfully identifies winning stocks.
Index constituents and methodologies are generally predefined, which can make it easier for investors to understand what the fund is designed to own.
Before you invest
The index is the most important part of an index fund. Two index funds can follow completely different strategies.
Check:
A passive fund is useful only if it tracks its benchmark reasonably closely. Compare funds tracking the same index based on their tracking performance and expenses.
A small difference in annual expenses can matter over a long investment period. Compare costs among funds following the same or very similar benchmarks.
Not every index is broadly diversified. Sector, thematic, smart-beta, and narrow-market indices may have substantial concentration.
An index fund generally follows the market downward as well as upward. Passive management does not provide protection against broad market corrections.
An index that performed exceptionally well recently may already have expensive valuations or high concentration in a few winning stocks. Understand the underlying methodology before investing.
Taxation
Tax treatment depends on what the index fund invests in rather than simply on the word "index."
An index fund that satisfies the applicable conditions for an equity-oriented mutual fund is generally taxed under equity-oriented mutual fund provisions.
For qualifying equity-oriented units held for more than 12 months, gains are generally considered long-term capital gains.
Long-term capital gains covered under Section 112A are generally taxed at 12.5% above the applicable annual exemption threshold.
For qualifying units held for 12 months or less, gains are generally treated as short-term capital gains and taxed at the applicable special rate under Section 111A.
Debt, international, commodity, or other types of index funds can have different tax treatment.
Check the underlying portfolio and prevailing tax rules before investing or redeeming.
Step by step
Good to know
An index mutual fund is a passive fund designed to track a specified market index by holding securities according to the index's methodology.
No. Expenses, portfolio execution, cash holdings, and other factors can cause the fund's return to differ from the benchmark.
Tracking error measures the variability in the difference between the fund's performance and its benchmark. Investors should also examine the actual tracking difference.
Not necessarily. Market risk depends primarily on what the fund owns. A small-cap or sector index can be substantially more volatile than a broad large-cap index.
Both can track indices. Index mutual funds are generally bought and redeemed with the mutual fund at applicable NAV-based prices, while ETFs are typically traded on stock exchanges during market hours.
Yes. Open-ended index mutual funds generally allow SIP investments, subject to the scheme's terms.
Recap
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FUND
IDBI Nifty 50 Index Fund Direct Plan GrowthEquity Index-Fund₹39.38
0.06%
16.84%
21.06%
12.57%
DSP Nifty 50 Equal Weight Index Fund Direct GrowthEquity Index-Fund₹26.81
0.54%0.5%
11.08%
11.46%
Aditya Birla Sun Life Nifty Smallcap 50 Index Fund Direct GrowthEquity Index-Fund₹24.37
0.58%15.65%
18.18%
13.37%
Kotak Nifty Next 50 Index Fund Direct GrowthEquity Index-Fund₹21.16
0.62%6.76%
16.28%
11.76%
LIC MF Nifty Next 50 Index Fund Direct GrowthEquity Index-Fund₹59.27
0.61%6.98%
16.27%
11.67%
UTI Nifty Next 50 Index Fund Direct GrowthEquity Index-Fund₹26.8
0.62%6.7%
16.25%
11.59%
Motilal Oswal Nifty Next 50 Index Fund Direct GrowthEquity Index-Fund₹25.93
0.62%6.61%
16.22%
11.6%
SBI Nifty Next 50 Index Fund Direct GrowthEquity Index-Fund₹20.02
0.62%6.66%
16.21%
11.58%
I
ICICI Prudential Nifty Next 50 Index Fund Direct Plan GrowthEquity Index-Fund₹67.1
0.62%6.46%
16.02%
11.45%
HSBC Nifty Next 50 Index Fund Direct GrowthEquity Index-Fund₹31.65
0.62%6.3%
15.88%
11.27%
IDBI Nifty 50 Index Fund Direct Plan Income AnnuallyEquity Index-Fund₹37.55
0.06%16.84%
21.05%
12.56%
DSP Nifty 50 Equal Weight Index Fund Direct Payout of Income Dist cum Cap WdrlEquity Index-Fund₹21.94
0.54%0.5%
11.02%
11.37%
Aditya Birla Sun Life Nifty Midcap 150 Index Fund Direct GrowthEquity Index-Fund₹25.86
0.24%6.48%
14.13%
16.12%
Kotak Nifty Next 50 Index Fund Direct Reinvestment of Income Dis cum Cap wdrlEquity Index-Fund₹21.16
0.62%6.76%
16.28%
11.76%
LIC MF Nifty Next 50 Index Fund Direct Payout of Income Distribution cum Cap WdrlEquity Index-Fund₹59.27
0.61%6.98%
16.27%
11.67%
Nippon India Nifty Midcap 150 Index Fund Direct Reinvestment Inc Dist cum Cap WdrlEquity Index-Fund₹26.48
0.24%6.58%
14.02%
16%
Motilal Oswal Nifty Midcap 150 Index Fund Direct GrowthEquity Index-Fund₹41.48
0.24%6.68%
14.25%
16.23%
SBI Nifty Next 50 Index Fund Direct Reinvestment Inc Dist cum Cap WdrlEquity Index-Fund₹20.02
0.62%6.66%
16.21%
11.58%
Sundaram Nifty 100 Equal Wgt Dir GrEquity Index-Fund₹191.67
0.61%3.44%
13.21%
11.07%
HDFC NIFTY50 Equal Weight Index Fund Direct GrowthEquity Index-Fund₹18.18
0.54%0.39%
11.03%
11.41%
Showing 1–20 of 456
