Index funds’ performance depends on underlying indices including Sensex, CNX Midcap & Small Cap, Nifty, Nifty Midcap, BSE 200, and Nifty Midcap. These are ideal for a buy and hold strategy because they are unaffected by fund manager’s bias. Additionally, passive management of these funds decreases costs and expenses related to your investment.
Find the list of top 10 best index mutual funds in India in this article.
Top 10 Best Index Mutual Funds in India
Here is a list of top 10 best index mutual funds in India. This list is sorted as per the funds’ 3-year CAGR in descending order.
| Sr. No. | Name of Funds | 3-Year CAGR |
| 1. | Motilal Oswal Nifty Smallcap 250 Index Fund | 24.57% |
| 2. | Motilal Oswal Nifty Midcap 150 Index Fund | 24.53% |
| 3. | DSP Nifty 50 Equal Weight Index Fund | 19.13% |
| 4. | Motilal Oswal Nifty 500 Index Fund | 16.73% |
| 5. | Sundaram Nifty 100 Equal Weight Fund | 16.06% |
| 6. | DSP Flexi Cap Fund | 15.83% |
| 7. | Taurus Nifty 50 Index Fund | 15.61% |
| 8. | IDFC Nifty 50 Index Fund | 15.49% |
| 9. | Motilal Oswal Nifty 50 Index Fund (MOFNIFTY50) | 15.38% |
| 10. | Axis Nifty 100 Index Fund | 15.19% |
* Note: NAV & Returns data as on 6th Jan, 2023.
What Is an Index Fund?
An index fund is a specific kind of mutual fund that replicates movements of broader market indices such as Nifty or Sensex. Additionally, the investment portfolio will include all of the equities that make up the Sensex and/or Nifty. These funds enable investors to access a larger market sector for less money.
Indices such as Sensex and Nifty represent firms based on their free-float market capitalisation. Investors hope to gain from the strong reputation and revenue-generating nature of companies in both indices. Investors must invest in index constituents at the same weight as the index because these indices are not stocks, but rather an index.
How Does an Index Fund Work?
When you purchase an index fund, a fund manager invests your funds in equities in the same ratio as the index that your fund is monitoring.
For instance, a NIFTY Index Fund invests in the same proportion of equities of the companies that make up NIFTY 50 Index with the goal of generating returns comparable to those of the NIFTY 50 Index. As Reliance owns 10.3% of NIFTY 50, for instance, the fund manager of a NIFTY Index Fund will create a portfolio of 10.3% of the stocks in Reliance corporation. Similar to how the index is held, additional companies' equities will be held in an equal distribution.
A fund and its index both offer roughly the same return when it comes to performance. Fund management works to reduce tracking error, which is caused by the difference between the two. These funds' cost structures are extremely low because they don't have a management team and don't actively buy and sell stocks.
Who Are the Ideal Investors for Index Funds?
Index funds are an ideal investment vehicle for you if you find the following criteria matching your financial objectives:
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Hands-off Fund Management
You must monitor the performance of actively managed funds you participate in. In a crash, the fund can lose more value than the markets or the average for its category. Due to bad investment choices, the fund might not even provide returns at the level of the market. All of these call for regular evaluation and monitoring of fund performance.
Index Funds eliminate this requirement. The portfolio and performance of the fund are both correlated to a particular index. Investors can invest and wait for their ROI.
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Satisfied with Market Level Return
Index Funds are appropriate for you as an investor if you are content with the returns provided by the market and do not want to take on more risk in order to potentially achieve larger returns.
Because these funds mimic the market Index, the returns they provide are the same as those of the Index. Additionally, because indices truly reflect the market, the returns are what is known as market-level.
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Return Free from Human Bias
Biases are inevitable when someone is deciding where to put money in investments. Although the fund managers will make informed decisions, they will have their own opinions and views, thus biases could still creep in.
Index funds entirely eliminate human bias from the decision-making process. The fund manager just repeats the index because the indexes are created in accordance with specific principles. As a result, index funds are a good choice if you wish to invest without bias.
What Are the Advantages of Index Funds?
You should know about the following benefits of investing in an index fund for making an informed decision:
- Low Cost: When compared to actively managed funds, index funds have lower expense ratios. An actively managed fund often charges more than this, while an index fund normally charges between 20% and 50%. The take rate for investors decreases as the expense ratio rises.
- Better Management: Because the asset allocation in index funds is not up to the fund management, there is less chance that investors would lose money as a result of the manager's poor choices.
- Risk Mitigation: By making an investment in index funds, you gain exposure to the index, reducing the unsystematic risk to the investors.
- Portfolio Diversification: Index funds offer diverse exposure because they include all of top companies that make up an index. By using diversification, investors can lower any risk associated with holding onto a specific stock or industry, such as auto, pharmaceutical, etc.
How Are Index Funds Taxed?
Mutual fund returns are considered capital gains. Depending on the type of capital gain - short term or long-term capital gain - taxation is applicable to the returns. Here are the implications:
- If units are sold within a year after the allotment date, the returns are short-term capital gains and are subject to a 15% tax.
- If units are sold after a year, then the returns are long-term capital gains. Above ₹1,00,000, are taxed at 10% without the advantage of indexation.
Final Word
An index mutual fund mimics and does not surpass the performance and movement of underlying indices, such as Nifty or BSE Sensex. The best index funds are those with the lowest tracking error and a performance that matches the index. Top index funds in India offer outstanding market exposure for risk and return, and are regarded as the best option for investors.