Best Index Mutual Funds for Investments 2025

Index Funds refer to the Mutual Fund schemes whose Portfolio is constructed using a Market index as a base. In other words, the performance of an index fund is dependent on the performance of a particular index. These schemes are passively managed. These funds contain shares in the similar proportion as they are in a particular index.

In India, many of the schemes use Nifty or Sensex as the base to construct their portfolio. For example, if the Nifty portfolio constitutes of SBI shares whose proportion is 12% then; the Nifty Index fund will also have 12% equity shares.

They passively track the performance of a particular index. Unlike actively-managed funds, index funds are not meant to outperform the market, but mimic the performance of the index. When an investor is planning to invest in index funds, they should pay attention to the tracking error of the fund. The tracking error measures the deviation of fund return from benchmark it is tracking. It is the difference between the index fund return and its benchmark return. The lower the tracking error, the better the fund’s performance.

Types of Funds in Passive Index Funds

Passive index funds are investment vehicles designed to replicate the performance of a specific Market Index. Here are the types of funds that fall under the category of passive index funds:

1. Equity Index Funds

These funds track equity indices like the Nifty 50, Sensex, or global indices such as the S&P 500. Examples:

• Nifty 50 Index Fund
• Sensex Index Fund
• S&P 500 Index Fund

2. Exchange-Traded Funds (ETFs)

ETFs are similar to index funds but trade like stocks on exchanges. They track a variety of indices, including:

• Nifty ETFs
• Sensex ETFs
• Nasdaq 100 ETFs

3. Debt Index Funds

These funds replicate the performance of bond indices, providing exposure to fixed-Income securities. Examples:

• Bharat Bond ETF
• 10-Year G-Sec Index Fund

4. International Index Funds

These funds provide exposure to foreign markets by tracking indices from other countries or regions. Examples:

• Nasdaq 100 Index Fund
• S&P Global 100 Fund

5. Sectoral or Thematic Index Funds

These funds track indices focused on specific sectors or themes, such as IT, banking, or healthcare. Examples:

• Nifty Bank Index Fund
• Nifty IT Index Fund

6. Gold ETFs

Though not traditional index funds, gold ETFs function like Passive Funds by tracking the price of gold.

7. Multi-Asset Passive Funds

These funds passively invest in a combination of asset classes, such as equity, debt, and gold, based on predefined indices.

Why to Invest in Index Funds in India?

Some of the benefits of investing in Index Funds are:

1. Diversification

An index is a collection of different stocks and securities. They offer diversification to the investor which is the main motive of Asset Allocation. This ensures that the investor does not have all his eggs in one basket.

2. Less Expenses

Index fund has a lower operating expenses as compared to other mutual fund schemes. Here, the fund managers need not have a separate team of research analysts to carry out an in-depth research of the companies against, which a significant amount is spent. In index funds, the manager just needs to replicate the index. Therefore, the expense ratio is lower in case of index funds.

3. Less Managerial Influence

Since the fund simply follows the movement of the particular index, the manager doesn’t have to choose what stocks to invest in. This is a plus point since the manager’s own style of Investing (which may not be in sync with the market at times) does not creep in.

Type of Index Mutual Funds

The weightage of a company in the Sensex or Nifty depends on its free Float market capitalization. It is a percentage of the total market capitalization of the index. So, if the market capitalization of a company is Rs 1 crore, while that of the index if Rs 200 crore, its stock has a weightage of 0.5%.

1. SENSEX Index Funds

These index funds track BSE SENSEX as bechmark index & invest in 30 companies on BSE Sensex based on weightage login as discussed above. These Types of Mutual Funds are backed by ETF's (Exchange Traded Fund) traded on exchange.

2. NIFTY Index Funds

These index funds track NSE NIFTY 50 as bechmark index & invest in 50 companies on Nifty 50 based on weightage login as discussed above. These types of Mutual Funds are backed by ETF's (Exchange Traded Funds) traded on exchange.

3. NIFTY Junior Index Funds

These index funds track NSE NIFTY Junior 50 as bechmark index & invest in 50 companies on NSE NIFTY Junior 50 based on weightage login as discussed above. These types of mutual funds are backed by ETF's (Exchange Traded Funds) traded on exchange.

Top 9 Best Performing Index Funds FY 25 - 26

*Below is the list for Index Mutual Funds having atleast 15 Crore or more in Net Assets.

Why Passive Index Funds are Better?

The impressive growth in gold ETFs highlights a key trend: investors are increasingly gravitating toward passive investment options. Gold ETFs, much like passive index funds, offer a cost-efficient, low-maintenance way to participate in market movements. With net assets under management in gold ETFs surging by 59% from October 2023 to October 2024, it’s clear that the preference for simplicity and tax Efficiency is driving this shift.

Similarly, passive index funds outperform actively managed funds for many investors due to their low expense ratios, diversification, and transparency. Just as gold ETFs allow investors to gain exposure to gold without the complexities of physical storage, index funds let you mirror market performance without the hassle of active stock selection. By avoiding high management fees and reducing risks associated with individual stock picking, passive index funds align with the same principles that have made gold ETFs increasingly popular.

Passive index funds have expense ratios as low as 0.10%-0.50%, compared to 1.5%-2% for actively managed funds. In 2024, investors saved significantly on costs by choosing passive funds, boosting their net returns.

International passive funds like Nasdaq 100 Index Funds delivered robust returns of over 20% in 2023, outpacing many global actively managed funds.

Many actively managed Equity Funds underperformed their benchmark indices in 2023. For instance, as per Industry reports, over 60% of large-cap mutual funds failed to beat the Nifty 50 returns, largely due to high fees and inefficiencies in stock picking.

Nifty 50 in 2023 delivered returns of 11.5%, while the average actively managed Large cap fund lagged at 9.8%.

Passive Funds - Safe Heaven Amidst Coronavirus Pandemic

With the current situation across the globe, the financial markets are facing issues of deep concern. While investors were willing to take a risk in the past, today’s conditions have pushed the majority of the investors to look for a Safe Haven. This means they are looking for an investment that will yield higher returns or at least stable returns.

Several investors are now looking to invest through passive modes such as exchange-traded funds or index funds. As per AMFI, Inflow into the index funds faced an all-time high of Rs. 2076.5 crore in March 2020.

Passive Funds Vs Active Funds

There are specific differences in the way they function and affect the investor.

The tabular differentiates between passive funds and active funds:

Risks of Investing In Index Funds

No Flexibility of Index Mutual Funds

One major disadvantage is the lack of flexibility. Since the funds just track the index, they can miss out on the opportunity to make higher returns which may arise due to market anomalies and surprises that are not connected to the index. Typically, value stocks would find it very difficult to be part of an index.

Market Risk on Index Mutual Funds

They have a direct relation with the market. So, when the stock markets fall as a whole, so does the value of the index mutual fund. Despite having a few disadvantages, top index funds can be beneficial for investors who want to invest in equities with a minimal risk Factor. As per experts, investors are suggested to include 5-6% of Index Funds in their investment portfolio to make best out of their investment.

How to Invest in Index Mutual Funds Online?

1. Open Free Investment Account for Lifetime at Fincash.com.

2. Complete your Registration and KYC Process

3. Upload Documents (PAN, Aadhaar, etc.). And, You are Ready to Invest!

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FAQs

1. Why should you invest in index mutual funds?

A: If you want to make a long-term investment, then you can consider index fund. The portfolios of these funds are designed by tracking the composition and behavior of the NSE and SENSEX. As these portfolios are developed by evaluating the stocks' performance and shares over a long period, the chances of your investment not performing are minimized. Hence, investing in Index mutual funds is advised, especially if you are looking to reduce the risk.

2. How to select a particular index MF?

A: You should select an individual portfolio of Index mutual funds based on its long term performance. Some of the more reliable funds are SBI, LICI, ICICI Prudential UTI, and other similar index funds used as a base for benchmarking.

3. What is the main advantage of investing in an Index fund?

A: The index funds are passively managed. Thus, the total expense ratio or TER of the index funds is lower than that of the actively managed funds. This means your investment will be lower, and the expense that you can expect can be as low as 0.2% to 0.5% of your investment. The low TER is the main advantage of investing in an Index Fund.

4. Do Passive Index Funds guarantee returns?

A: No, they don’t guarantee returns. They mirror the performance of their benchmark index, which fluctuates based on market conditions.

5. Do Passive Index Funds pay dividends?

A: Some funds offer dividend options, but the growth option, where dividends are reinvested, is more popular for wealth accumulation.

6. How do Index Funds add to diversification?

A: Index funds primarily consist of top companies whose stocks are used as benchmarks. Additionally, in a single portfolio, you will have multiple leading companies, which means the chances of losing your investment will be reduced. This auto diversification automatically reduces the investor's risk of losing the investment.

7. When should you consider investing in Index funds?

A: You should invest in Index Funds when you are prepared to hold your investment for at least 5 years.

8. Is there some way that I can select the best Index fund?

A: If you are a newbie then you should discuss it with the fund manager. They help you to decide on the suitable funds. Additionally, you should also consider the time duration of investment.

9. Who is ideally suited to invest in Index Funds?

A: Individuals who do not wish to undertake much risk when investing in Mutual Funds can consider investing in index funds. These funds do not just assure investors sure returns, but also do not require extensive investment from the investor.