List of Best Index Mutual Funds to Invest in India in 2022

9 min read • Published 19 October 2022
Written by Nishant Prasad
Know the details of top index mutual funds

An index mutual fund is an open-ended and passively managed scheme that aims to replicate a particular index. These funds must mandatorily invest a minimum of 95% of their total assets in the securities of the index that it replicates. Additionally, the performance of this mutual fund scheme is aligned with its underlying index. 

Top Index Mutual Funds to Invest in India in 2022

Illustrated below are the best index mutual funds in 2022 based on their five-year annualised returns: 

Name of Index Mutual Fund 5 Year Annualised Returns 
Nippon India Index Fund-Direct Plan-S&P BSE Sensex Plan-Growth 14.22% 
HDFC Index Fund-S&P BSE Sensex Plan-Direct Plan 14.13% 
Tata S&P BSE Sensex Index Fund-Direct Plan 14.06% 
LIC MF S&P BSE Sensex Index Fund-Direct Plan-Growth 13.79% 
IDFC Nifty 50 Index Fund-Direct Plan-Growth 13.44% 
Taurus Nifty 50 Index Fund-Direct Plan-Growth 13.37% 
UTI Nifty 50 Index Fund-Direct Plan-Growth 13.29% 
HDFC Index Fund-Direct Plan-Nifty 50 Plan 13.22% 
Tata Nifty 50 Index Fund-Direct Plan 13.22% 
Nippon India Index Fund-Direct Plan-Nifty 50 Plan-Growth 13.15% 
ICICI Prudential Nifty 50 Index Fund-Direct Plan-Growth 13.11% 
*Returns data valid as of August 25, 2022 

How Does an Index Mutual Fund Work?

Index mutual funds fall under the category of passively managed funds. This is because they do not require a dedicated team of research analysts for asset allocation and tracking opportunities. 

These mutual fund schemes track or replicate a particular index, which is a group of securities that represent the overall market or a specific market segment. The fund managers of such funds do not actively select stocks to build a portfolio. Instead, he or she simply tracks the index. 

The weightage of securities in an index fund depends solely on their weightage in the underlying benchmark. If their weightage changes, the fund manager will buy/sell securities to mirror the index. As a result, returns from index funds are in line with the index it replicates because it is designed in such a way.

Note that though the returns are almost similar to that of the underlying benchmark, tracking errors may still exist. Financial experts have defined tracking error as the annualised standard deviation of the tracking difference of an index fund. It is the fund manager’s responsibility to control tracking errors. 

Who should Invest in Index Mutual Funds?

Detailed below are the suitability parameters of index fund investors: 

  • These schemes are ideal investment options for investors who do not want to take the high risks of actively managed funds. 
  • People who do not want to take the trouble of extensively researching and tracking funds can opt for index mutual funds.
  • Investors who can remain invested for a longer period can consider investing in index funds.

Features of Index Funds

Discussed below are the features of these mutual fund schemes:

  • The fund manager can make very few periodic changes as these schemes are passively managed. Primarily, they adjust the fund to keep it in sync with the index it is tracking.
  • Moreover, an index mutual fund offers the same returns and carries the same risks as its underlying index. 
  • As the index’s composition is public knowledge, investors will know the instruments the scheme has invested in.
  • These funds have a low expense ratio as compared to actively managed funds. It is capped at 1.5%.

Benefits of Index Mutual Funds 

The benefits of these mutual fund schemes are as follows: 

  • Broad market exposure

Major indices like Sensex and Nifty 50 are created to represent the overall market. So, index funds tracking these indices have diversified portfolios that cover important sectors and stocks. 

These schemes invest money in the same proportion as their underlying index. This reduces risks and improves the fund’s potential to generate good returns. Let us illustrate this with an example. Suppose an investor has decided to invest in a Nifty 50 index fund. He can enjoy investment exposure in 50 stocks across almost 13 diverse sectors. These sectors range from financial services to pharmaceutical services. 

  • Low fees

Considering that an index mutual fund replicates an underlying index, there is no need for a team of analysts for the fund manager. Moreover, the fund manager does not have to devote much time to picking the right stocks and constructing a portfolio. This scheme also does not involve any active trading of stocks. 

A combination of all of these factors has reduced the cost of managing an index fund. This translates to low fees for these schemes. 

  • No bias investing 

The regulation-based automated investment method that an index fund follows removes any chance of human bias in formulating major decisions. The fund manager has to follow a specified mandate regarding the amounts he needs to invest in various securities.

Also Read: What Are the Ways to Invest in the Nifty 50 Index?

Limitations and Challenges of Index Mutual Fund Investment 

Discussed below are challenges associated with investing in an index fund:

  • An index fund does not have the advantage of flexibility because it must replicate its underlying index mandatorily. 
  • Index mutual funds miss out on the expertise of a fund manager and a structured investment approach. 
  • These schemes are subject to tracking errors caused by index constituent changes, corporate actions and liquidity provisions. 

Risks Associated with Index Mutual Funds 

Usually, finance experts consider index funds to be less risky than actively managed equity funds. However, there are a few risks associated with these schemes: 

  • Market volatility

Index funds are not able to provide protection against market volatility. So, the index fund will also fall if stock prices move down massively. In addition, the nature of the index that a scheme replicates will affect return volatility. 

  • Business or governance risks

If a business develops issues related to quality or governance, it is bound to have a negative effect on its stock prices. As a result, these stocks will lose weightage in the particular index and gradually get dropped from it. However, index fund investors have no other option but to accept these price movements.

  • Portfolio concentration 

In India, index mutual funds are associated with concentration risks. This is because these schemes have high weightage in the top sectors and their relevant stocks. Such concentration has become more visible in recent years. However, some stocks may remain static as a result of portfolio concentration.

Read More: Invest in the Best Balanced Mutual Funds of 2022

Taxation of Index Mutual Funds

While redeeming units of their index fund investment, people may earn capital gains which are taxable. The tax rate depends on the holding period of one’s investment. These details are mentioned below:

  • If the holding period is less than 12 months, then the investor earns STCG (short term capital gains). These are taxed at 15% (plus surcharge plus 4% health and education cess). 
  • If the holding period is 12 months or more, the investor earns LTCG (long term capital gains). The applicable tax rate for LTCGs is 10% (plus surcharge, plus 4% health and education cess). This is applicable only if the total LTCG from equity shares or equity-oriented schemes crosses Rs. 1 lakh in a year. 

Important Factors to Consider before Investing 

Given below are important factors that people must consider before investing in an index fund:

  • Tracking Errors

There might be times when an index fund cannot match its benchmark index’s performance. This primarily occurs because of tracking errors. So, choosing an index fund with a low tracking error is important. This is because a low tracking error is indicative of minimum deviation from the index’s returns and good fund performance. 

  • Risk tolerance

Index funds indeed protect investors from equity-linked risks and volatilities. But, if the market spirals down, index funds may lose value. Therefore, it is a good idea to have a mix of both index funds and active funds in your investment portfolio. 

  • Investment horizon 

Investors may want to stay invested in index funds for a long period to balance out short-term fluctuations. It is essential if someone wishes to take advantage of the fund’s total return potential. Furthermore, it also yields good returns. 

Final Word

Index mutual funds are a suitable investment option for people with a relatively low-risk appetite who want to participate in the equity market. These open-ended passively managed schemes replicate the performance of an index. Broad market exposure and no-bias investing are some of its key benefits. 

FAQs about Index Mutual Funds

What is the ideal investment tenure for an index fund?

Long investment tenure is ideal for receiving returns from index funds. It is a good idea to remain invested for six or seven years. 

Is it safe to invest in index funds in India? 

In India, there are many opportunities for investing in schemes with high alpha. As a consequence, there remains a possibility of index mutual fund schemes underperforming actively managed funds. Additionally, many fund managers have the experience and knowledge to beat the index. However, the situation is gradually changing. Many people are increasingly opting to invest in index funds. 

How much money should I invest in index mutual funds? 

The amount of money an investor should invest in an index fund depends on the investor’s risk profile and financial goals. Generally, financial advisors recommend aggressive investors to allocate less to index funds. On the other hand, they encourage conservative investors to invest more in index mutual funds. 

How much returns can I expect from index funds?

The returns depend on the index the fund is tracking. Generally, large-cap indices generate returns in the range of 10% – 12% over a long-term investment horizon. Mid-cap and small-cap indices may yield higher returns. But, please note that there is no guarantee that a scheme will deliver such returns.

Can I lose money in an index fund?

Index mutual fund schemes are market-linked products. So, there remains a chance of you losing your money. But, as per records, if someone remains invested for a long time, the risk of losing money is relatively low.

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Nishant Prasad

Chief Compliance Officer
Nishant is a qualified lawyer from NALSAR University of Law, Hyderabad having 8+ years of experience and is the Chief Compliance and Legal Officer at Wint Wealth. He has been working in the finance and wealth management space for the past 5+ years and is an NISM certified mutual fund expert. He has previously worked for Khaitan & Co and Scripbox.

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