Nowadays, index fund investing is becoming popular in India, but do you know how index fund investing works? I know that if you are a new investor, you may not be aware of index investing, which is a passive investment strategy.
You already know about stock market indices, which contain a number of stocks from different sectors or even a single sector. They represent the performance of the market. For example, the Nifty 50 Index consists of 50 stocks that are rebalanced from time to time by NSE Indices Limited in India.
You cannot directly invest in an index itself, but you can invest through ETFs or index mutual funds, which replicate the performance of the original Nifty 50 Index. These investment options allow you to start index investing. Below is a list of some of the top index mutual funds.
Related Article: What is a Mutual Fund: A Step by Step Guide?
| Index Fund | Benchmark | Suitable For |
| UTI Mutual Fund UTI Nifty 50 Index Fund | Nifty 50 | Beginners seeking broad large-cap exposure |
| HDFC Mutual Fund HDFC Nifty 50 Index Fund | Nifty 50 | Long-term core portfolio |
| ICICI Prudential Mutual Fund ICICI Prudential Nifty 50 Index Fund | Nifty 50 | Low-cost passive investing |
| SBI Mutual Fund SBI Nifty 50 Index Fund | Nifty 50 | Conservative long-term investors |
| Nippon India Mutual Fund Nippon India Nifty 50 Index Fund | Nifty 50 | Passive equity exposure |
| Motilal Oswal Mutual Fund Motilal Oswal Nifty 500 Index Fund | Nifty 500 | Broader diversification across Indian equities |
| ICICI Prudential Mutual Fund ICICI Prudential Nifty Next 50 Index Fund | Nifty Next 50 | Higher growth potential with higher volatility |
| Motilal Oswal Mutual Fund Motilal Oswal S&P 500 Index Fund | S&P 500 | International diversification (U.S. market) |
As you can see from the table above, I have selected some of the top index mutual funds for investors. The same concept also applies to international investing. As shown in the last row of the table, you can invest in an S&P 500 Index Fund, which represents the U.S. stock market. Nowadays, sector based index funds and ETFs are also available if you are interested in sector specific index investing.
Why should you invest in an Index Fund?
Index fund investing, in my opinion, is best for those who want to invest in the Indian market while keeping risk relatively lower. It is also a preferred choice for investors who do not have enough knowledge about investing or are not confident in selecting individual stocks or actively managed mutual funds.
If you are a new investor and are looking for a simple and stable investment approach, index fund investing can be a better choice.
Expense Ratio
Every mutual fund AMC charges a management fee for its mutual fund schemes. The expense ratio can vary from one AMC to another and from one fund to another. On the other hand, index funds and ETFs generally charge lower expense ratios.
Over the long term, the expense ratio plays an important role because it can significantly reduce your overall returns. If you care about keeping investment costs low, index fund investing is worth considering.
Returns
As I mentioned earlier, these index funds replicate the original index, so they aim to deliver similar returns. It is true that in recent years, many actively managed mutual funds have failed to beat their benchmark indices, making index investing more appealing compared to traditional mutual fund investing.
However, the right choice ultimately depends on your financial goals, risk tolerance, and return expectations.
Which index should you choose?
• Nifty 50: Best for most investors. Covers India’s 50 largest listed companies.
• Nifty Next 50: Higher growth potential with greater volatility.
• Nifty 500: Exposure to large cap, mid cap, and small cap companies in a single fund.
• S&P 500: Provides international diversification by investing in leading U.S. companies.
Suggestion for New Investors
You can follow a simple passive investing strategy by allocating 70% to 80% of your portfolio to a Nifty 50 Index Fund. The remaining 20% to 30% can be invested in a Nifty Next 50 Index Fund, which offers higher growth potential but comes with higher volatility.
To learn more about international investing, you can read my previous article, “Why Indians Should Invest in Overseas Markets: Opportunities, Growth, and Smart Financial Moves.“
