Index Fund

An index fund is a mutual fund that mimics an index's portfolio. Index-tied or index-tracked mutual funds are another name for these vehicles. These funds are managed passively since the primary goal of index funds is to follow and replicate the performance of a famous stock market index such as the S&P BSE Sensex and NSE Nifty 50. An index fund's asset allocation would be the same as that of its underlying index. As a result, the returns provided by index funds are equivalent to the underlying index.

Index funds are investments that track a certain index. Their primary purpose is to create a portfolio that resembles a stock market index. A fund that tracks an index invests in the same equities as the index.


  • An index fund is a stock or bond portfolio designed to replicate the composition and performance of a financial market index.
  • Actively managed funds have higher expenditures and fees than index funds.
  • Index funds attempt to mirror the market's risk and return on the idea that the market will outperform any single investment over the long run.
  • A passive investment approach is used by index funds.

  • How does Index Fund Works ?

    The term "indexing" refers to a type of passive fund management. Instead of actively stock picking and market timing—that is, selecting securities to invest in and planning when to purchase and sell them—a fund portfolio manager develops a portfolio whose holdings reflect the stocks of a certain index. The assumption is that by imitating the index's profile—the stock market as a whole, or a wide section of it—the fund's performance would match.

    When an index fund tracks a benchmark, such as the Nifty, its portfolio will contain the same 50 equities as the Nifty, in the same proportions. An index is a collection of securities that define a market sector. These securities can be either bond market instruments or equity market products such as stocks. The BSE Sensex and NSE Nifty are two of India's most popular indexes. Index funds are classified as passive fund management since they monitor a certain index. The fund management determines which equities must be purchased and sold based on the composition of the underlying benchmark. Index funds, unlike actively managed funds, do not have a separate staff of research analysts to find opportunities and choose stocks. Instead, index funds monitor an index.

    Types of Index Fund

    NIFTY 50

    While an actively managed fund tries to outperform its benchmark, the goal of an index fund is to mirror the performance of its index. Index funds often produce returns that are close to or equal to the benchmark. However, there may be a little discrepancy in performance between the fund and the index. This is known as the tracking mistake. The fund manager must strive to reduce tracking error as much as feasible.

    Index-Fund Vs Actively Managed Fund

    Purchasing an index fund is a type of passive investment. Active investing, on the other hand, is achieved in actively managed mutual funds, which have the securities-picking, market-timing portfolio that managers mentioned above.

    Lower Cost

    The reduced management expense ratio is one of the key advantages of index funds versus actively managed competitors. The expenditure ratio of a fund, also known as the management expense ratio, accounts for all operational expenses such as payments to advisers and managers, transaction fees, taxes, and accounting fees.

    Pros Cons
    Diversification reduces risk. Market swings and crashes are a risk.
    Low expense-to-income ratios Lack of adaptability
    Long-term returns are excellent. There is no human aspect.
    Ideal for buy-and-hold investors. Gains are limited.
    Reduced taxes for investors

    Considerations for Investors Regarding Index Funds

    Risk tolerance

    Index funds are less vulnerable to the volatility and dangers associated with equities since they track an index. Index funds are a great choice if you want to make large profits in a market that is rising. But in a down market, you will have to move to actively managed funds. Index funds typically see a decline in value when the market is down. Therefore, it is recommended that your portfolio contain a combination of actively managed funds and index funds.

    Return Factor

    Index funds, as opposed to actively managed funds, passively follow the performance of the underlying benchmark. These funds seek to simply mirror the index's performance rather than outperform it. Unfortunately, tracking problems may cause the returns to fall short of the index. Variations from the real index results are possible.

    Cost of Investment

    Generally speaking, index funds have far lower expense ratios than actively managed funds. The index fund portfolios are typically maintained in a passive manner, meaning that the fund manager is not obliged to devise an investing strategy. This accounts for the variation in the expense ratio.

    Financial Goals

    For long-term financial objectives like retirement planning or asset growth, equity funds may be the best option. These funds are a high-risk, high-return sanctuary that can provide sufficient money to enable you to follow your passion and retire early.

    Index Funds

    Index funds invest in companies that track the performance of a major market index, such as the S&P 500 or the Dow Jones Industrial Average (DJIA). Because this method necessitates less research from analysts and advisers, less expenditures are passed on to shareholders, and these funds are frequently constructed with cost-conscious investors in mind.

    Related Articles

    Bandhan Nifty 50 Index Fund

    Minimum SIP Amount : ₹ 100
    The Bandhan Nifty 50 Index Fund Growth has an AUM of 867.38 crores & has delivered CAGR of 12.96% in the last 5 years.
    Current NAV: The Current Net Asset Value of the Bandhan Nifty 50 Index Fund - Regular Plan as of Sep 20, 2023 is Rs 42.44

    UTI Nifty 50 Index Fund.

    UTI Mutual Fund was carved out of the erstwhile Unit Trust of India as a Securities and Exchange Board of India registered mutual fund from 1 February 2003.
    P/E RATIO : 17.26
    Dividend Yield : 2.08%
    Primary Exchange : National Stock Exchange

    ICICI Prudential Nifty 50 Index Fund.

    Screen Description : Nifty Index Fund
    CAGR : 13.28%
    Net Asset Value : 195.0473%
    AUM : 4976.77cr

    Nippon India Index Nifty 50.

    Returns: Its trailing returns over different time periods are: 13.37% (1yr), 20.77% (3yr), 11.93% (5yr) and 9.86% (since launch).
    Category : India Equity
    YTD RETURN : 6.84%
    Expense Ratio : 1.75%

    HDFC Index Fund Nifty 50 Plan.

    ABOUT : The HDFC NIFTY Next 50 Index Fund Direct Growth is rated Very High risk. Minimum SIP Investment is set to 100. Minimum Lumpsum Investment is 100.
    Current NAV : 183.8472%
    Expense Ratio : 0.4%
    Fund Size: 9446.34cr

    SBI Nifty Index Fund

    ABOUT :SBI Nifty Index Direct Plan-Growth scheme's ability to deliver returns consistently is in-line with most funds of its category. Its ability to control losses in a falling market is average. The fund has the majority of its money invested in Financial, Technology, Energy, Consumer Staples, Automobile sectors.
    NAV : 171.6355
    Fund Size : 4862.69cr
    Expense Ratio : 0.5%


  • UTI Nifty Index Fund.
  • HDFC Index Nifty 50 Fund.
  • IDBI Nifty Index Fund.
  • Tata Index Fund Nifty.
  • Nippon India Index Fund Nifty Plan.
  • BlackRock
  • The Vanguard Group
  • Citi
  • JPMorgan
  • Goldman Sachs
  • Fidelity Investments

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