10 Best Index Funds and ETFs in India

Here, we have shared with you 10 Best Index Funds and ETFs in India. You also come to know:

Well, indirect investing in stocks is the best option for you when you lack the expertise (screening & analyzing stocks) of buying stocks directly.

So, Index Funds and ETFs can prove to be viable options as you avoid buying bad stocks. It means that if you’re not prepared to buy stocks directly, then you can invest in ETFs and Index Mutual Funds indirectly.

Index Funds

In this case, you need not decide which stocks to buy and when to sell. The investor can totally avoid the steps of stock analysis.

In fact, the mutual fund manager takes care. You simply need to contribute your money; the fund manager will take care of the rest. They will invest the pooled money, with the objective of good future returns.

So, investing in Index Funds and ETFs is like practicing passive investing. There is no active involvement. You simply have to buy an investment, and forget about it.

Moreover, ETFs are less risky than direct stocks and sectoral mutual funds. When you invest in a single stock, the chances of a loss are high. ETFs turn out to be the most cost-effective for investors.

Now, let’s get to know about Index Funds and Index ETFs in detail.

What are Index Funds?

An index fund can be understood as a type of mutual fund in which the portfolio is constructed by using the composition of a standard market index like NIFTY 50 or the Sensex. These are passively managed funds.

So, the fund manager goes on to invest in the same securities as present in the underlying index in the same proportion. These funds offer returns comparable to the index that they track.

They are also known as Index-tied or Index-tracked mutual funds. As the name suggests, Index Mutual Funds invest in an index. These funds go on to purchase all the stocks in the same proportion as in a particular index. So, the scheme performs in tandem with the index it is tracking.

The portfolios of these schemes have not been actively managed. It means that there is no buying and selling of stocks to generate extra returns. In a way, they incur lower expenses than actively-managed funds.

Moreover, the major idea behind index mutual funds:

It replicates the performance of an index in terms of returns at a minimal cost.

These are passive funds as they do not require a high level of active management of funds. They are cost-efficient as the expense ratio of index funds (and other fees) is lower than the actively managed funds.

How do Index Funds work?

Let’s suppose that an Index Fund tracks the NSE Nifty Index. So, this fund will have 50 stocks in its portfolio in similar proportions. This index fund will invest in all the securities that the index tracks.

In case of an actively managed mutual fund, it will endeavor to outperform its underlying benchmark. However, an index fund that is passively managed will try to match the returns offered by the underlying index.

Some Key Features of Index Funds

  • Index Funds are a long-term less risky form of investment
  • The success depends on the choice of index and their low volatility
  • It creates a portfolio that almost replicates the chosen index
  • The returns offered are similar to that of the index
  • Index Mutual Funds are passively managed
  • They are not meant to outperform the market. Instead, they mimic the index’s performance
  • It has lesser expense ratio and incurs low expenses
  • Index funds provide broad market exposure and offer low portfolio turnover to the investors

Who should invest?

  • Index funds are suitable for investors that want to invest for the long term
  • Index funds do not involve constant monitoring & juggling like mutual fund portfolio
  • With Index funds, you can gain from the mirror returns of SENSEX, NIFTY, etc
  • Index funds turn out to be a good investment if you wish to get better returns than Fixed Deposits over the long term
  • The Index funds are an excellent investment resource if you can buy-and-hold over a long term of 5 years or more
  • Index funds are known to be less prone to equity-related volatility and risks

Advantages of Index Funds

  • Low Cost: The total expense ratio (TER) is very less when compared to the actively managed funds. In fact, an index fund would typically charge you anywhere from 0.20% to 0.50% as TER. In the long run, this can be as large as 15% of your net returns.
  • Diversification: An index fund consists of top companies in terms of market capitalization. So, leading market players are a part of the benchmark index.
  • No errors: there is virtually any scope of the investor incurring losses due to poor management or inefficiency in asset allocation.
  • Efficient Market Hypothesis: An index fund would outperform all active funds in the long run.

Taxation on Index Funds

The short term capital gains are being taxed at 15% when the units are sold within one year from the date of allotment. The long term capital gains for the profit over Rs. 1 lakh (on the sale) within a year are taxed at 10% without indexation.

How can you invest in Index Funds?

You can invest in index mutual funds in the following ways:

  • By using Offline Mode

If you’re not an expert in investing, then you can choose to invest through a broker. You will require the following documents:

  • Identity Proof (Aadhar Card)
  • Canceled Cheque
  • Passport size photos (around 4 to 5)
  • PAN Card
  • KYC Documents (for KYC verification)
  • Through Online Mode of Investing

You can use online investment platforms like Paisabazaar.com for investing in index funds. Here, you can choose and compare more than 1500 funds. You can select the fund wherein you want to invest.

You can use the SIP Calculator or Lumpsum Calculator for estimating the future value of your investment.

What are Index ETFs (Exchange Traded Fund)?

Index ETFs are Exchange Traded Funds that replicate and track a benchmark index such as the S&P 500 or Nifty50 as possible. In fact, Index ETFs can be understood as index mutual funds.

However, unlike mutual funds that can be redeemed at just one price each day (the closing net asset value (NAV)). Index ETFs are bought and sold throughout the day on a major exchange, just like shares.

In fact, index ETFs offer investors the opportunity to gain exposure to numerous securities in a single transaction.

Index ETFs can cover different asset classes. Each asset comes with a passive investment strategy. So, the provider only changes the asset allocation when there are changes in the underlying index.

Index ETFs are usually traded at a slight premium or discount to the fund’s NAV. Index ETFs are constructed using the major indices like the Dow Jones Industrial Average, the S&P 500, Russell 2000, Nifty50 and BankNifty, etc.

Investors typically need to pay standard commission rates for ETF trades. It is usually charged when a buy or sell order is made. Index ETFs are mostly set up as open-ended mutual funds. They are generally traded with limit orders, sold short, and purchased on margin.

Key Takeaways

  • An ETF comes as a basket of securities that trade on an exchange, just like a stock
  • An index ETF replicates a benchmark index
  • Index ETFs are increasingly becoming popular as they provide investors with low-cost access to diversified & passive indexed strategies

Benefits of Index ETFs

  • Real-Time Price: You can buy or sell Index ETFs on a real-time basis in a live market just like stocks
  • Lower Cost: You tend to pay normal brokerage when you invest in Index ETFs as it is carried out directly on the exchange

Moreover, Index ETFs offer instant diversification in a tax-efficient & cost-effective investment. They are less volatile than a strategy specific fund and come with attractive fee structures.

However, no investment comes without risk.

So, you should consider asset fees, liquidity, and tracking errors among standard investing basics before heading to make an investment.

Index Funds vs. Index ETFs

Well, we must tell you that both the Index Fund and the Index ETF will essentially mirror an index. This index can be the S&P 500, Nifty, or the Sensex that you may opt for. The fundamental idea here is to mirror the index and offer returns that are closely aligned to the index returns.

So, the question arises, how are they different?

Basically, an index fund is a normal mutual fund scheme.

However, the fund manager does not select stocks but creates a portfolio that replicates an index such as S&P 500, Sensex, or Nifty. So, there is no stock selection in the index fund.

The only effort by the fund manager is to make sure that the tracking error is kept at the bare minimum.

Moreover, an index fund is open to purchase and redemption at any point in time. Also, the AUM of the index mutual funds keeps on changing.

On the other hand, an Index ETF is fractional shares of the index. It is like a closed-ended fund where the funds are raised in the beginning. Moreover, the ETF creates a portfolio of index stocks at the back-end for mirroring the index.

The ETF is mandatorily listed on the stock exchange. So, one can buy and sell them like equity shares in the market. You can even hold them in your Demat account.

For example, if Nifty is quoting 11,500, so ETF, which represents 1/10th or 1/100 unit of Nifty, will quote at an absolute value of 1,150 or 115.

Factors that drive your choice of Index Funds versus Index ETFs

  • When you buy an index fund, the net effect each day is that it will increase or decrease the AUM. However, you can buy or sell an Index ETF only if there is a counterparty to the trade. It means that liquidity is the key to Index ETFs. Their AUM will only increase if the value of shares goes up.
  • An index fund purchase or redemption is executed at the end-of-day (EOD) NAV. In contrast, Index ETF prices vary on a real-time basis. Moreover, the price also keeps changing frequently.
  • The expense ratio in an index ETF is much lower than an index fund. Generally, in India, the index fund comes with an expense ratio of 0.50% to 1.25%, while index ETFs come with an expense ratio of 0.35% to 0.50%.
  • With Index Funds, you can structure a systematic investment plan (SIP). However, Index ETFs are closed-ended. So, the benefit of automated SIPs is not available with them. This is one area where Index Funds score over Index ETFs. You have to purchase them like shares to average your holdings.
  • In Index Mutual Funds, the dividends are automatically reinvested. However, in ETFs, the dividends are directly credited in your registered bank account.

Wholistic Comparison of ETFs versus Index Funds

ParameterETFsIndex Funds
ObjectiveTracks the performance of indices of a particular exchangeReplicates the performance of a given index
How are they traded?They are being traded like a stock on an exchangeThey are issued like any other mutual funds
PricingIts pricing is like the principle of sharesThe NAV of the Fund Differs
Factors affecting the priceIt depends upon the demand and supply for the security in the marketNAV of the fund and the assets underlying
CostA transactional fee is applicableNo transactional fee & commission
Expense RatioLowHigh

5 Best Index Mutual Funds in India

Here, we have listed 5 Best Index Mutual Funds (in India) that you may invest in. The ideal investment horizon is of five years.

  • UTI Nifty Index Fund
  • SBI Nifty Index Fund
  • HDFC Index Fund
  • ICICI Prudential Nifty Next 50 Index Fund
  • Nippon India Index Sensex

5 Best Index ETFs in India

Here, we have listed out 5 best Index ETFs in India that can be viable and proven investment avenues for you:

  • SBI – ETF Nifty 50
  • Nippon India ETF Nifty BeES
  • Nippon India ETF Bank BeES
  • HDFC Sensex ETF
  • Motilal Oswal Nasdaq 100 ETF

Now, we have reached the end of this post. We hope that you would have gained much insight into Index ETFs and Funds. The post endeavors to help you make the right investment decision. We have also shared the list of 10 Best Index Funds and ETFs in India.

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