Best Index Mutual Funds for Investments 2025

Index Funds refer to the Mutual Fund schemes whose portfolio is constructed using a Market index as a base. In other words, the performance of an index fund is dependent on the performance of a particular index. These schemes are passively managed. These funds contain shares in the same proportion as they are in a particular index.

In India, many of the schemes use Nifty or Sensex as the base to construct their portfolio. For example, if the Nifty portfolio constitutes SBI shares with a proportion of 12%, then the Nifty Index fund will also have 12% equity shares.

They passively track the performance of a particular index. Unlike actively-managed funds, index funds are not meant to outperform the market, but mimic the performance of the index. When an investor is planning to invest in index funds, they should pay attention to the tracking error of the fund. The tracking error measures the deviation of fund return from the benchmark it is tracking. It is the difference between the index fund return and its benchmark return. The lower the tracking error, the better the fund’s performance.

Types of Funds in Passive Index Funds

Passive index funds are investment vehicles designed to replicate the performance of a specific Market Index. Here are the types of funds that fall under the category of passive index funds:

1. Equity Index Funds

These funds track equity indices like the Nifty 50, Sensex, or global indices such as the S&P 500. Examples:

• Nifty 50 Index Fund
• Sensex Index Fund
• S&P 500 Index Fund

2. Exchange-Traded Funds (ETFs)

ETFs are similar to index funds but trade like stocks on exchanges. They track a variety of indices, including:

• Nifty ETFs
• Sensex ETFs
• Nasdaq 100 ETFs

3. Debt Index Funds

These funds replicate the performance of bond indices, providing exposure to fixed-Income securities. Examples:

• Bharat Bond ETF
• 10-Year G-Sec Index Fund

4. International Index Funds

These funds provide exposure to foreign markets by tracking indices from other countries or regions. Examples:

• Nasdaq 100 Index Fund
• S&P Global 100 Fund

5. Sectoral or Thematic Index Funds

These funds track indices focused on specific sectors or themes, such as IT, banking, or healthcare. Examples:

• Nifty Bank Index Fund
• Nifty IT Index Fund

6. Gold ETFs

Though not traditional index funds, gold ETFs function like Passive Funds by tracking the price of gold.

7. Multi-Asset Passive Funds

These funds passively invest in a combination of asset classes, such as equity, debt, and gold, based on predefined indices.

Why to Invest in Index Funds in India?

Some of the benefits of investing in Index Funds are:

1. Diversification

An index is a collection of different stocks and securities. They offer diversification to the investor which is the main motive of Asset Allocation. This ensures that the investor does not have all their eggs in one basket.

2. Less Expenses

Index funds have lower operating expenses compared to other mutual fund schemes. Here, the fund managers do not require a separate team of research analysts to carry out in-depth research of the companies, which usually involves significant costs. In index funds, the manager just needs to replicate the index. Therefore, the expense ratio is lower in the case of index funds.

3. Less Managerial Influence

Since the fund simply follows the movement of a particular index, the manager doesn’t have to choose what stocks to invest in. This is a plus point since the manager’s own style of Investing (which may not always align with market trends) does not influence the fund.

Type of Index Mutual Funds

The weightage of a company in the Sensex or Nifty depends on its free float market capitalization. It is a percentage of the total market capitalization of the index. So, if the market capitalization of a company is Rs 1 crore, while that of the index is Rs 200 crore, its stock has a weightage of 0.5%.

1. SENSEX Index Funds

These index funds track the BSE SENSEX as the benchmark index and invest in 30 companies on the BSE Sensex based on weightage logic as discussed above. These Types of Mutual Funds are backed by ETFs (Exchange Traded Fund) traded on the exchange.

2. NIFTY Index Funds

These index funds track the NSE NIFTY 50 as the benchmark index and invest in 50 companies on the Nifty 50 based on weightage logic as discussed above. These types of Mutual Funds are backed by ETFs (Exchange Traded Funds) traded on the exchange.

3. NIFTY Junior Index Funds

These index funds track the NSE NIFTY Junior 50 as the benchmark index and invest in 50 companies on the NSE NIFTY Junior 50 based on weightage logic as discussed above. These types of mutual funds are backed by ETFs (Exchange Traded Funds) traded on the exchange.

Top 9 Best Performing Index Funds FY 25 - 26

*Below is the list for Index Mutual Funds having atleast 15 Crore or more in Net Assets.

Why Passive Index Funds are Better?

In 2024, passive investment options like gold ETFs and index funds gained significant traction among investors seeking cost-effective and low-maintenance avenues to participate in market movements.

Surge in Gold ETFs

Gold Exchange-Traded Funds (ETFs) witnessed a remarkable surge in 2024, with assets under management (AUM) growing by 63% to reach ₹44,595 crore by the end of December. This growth was driven by rising gold prices and strong investor inflows, indicating a preference for simplicity and tax Efficiency.

Performance of Passive Index Funds

Passive index funds outperformed many actively managed funds in 2024, Offering investors low expense ratios, diversification, and transparency. Over 300 passive mutual funds delivered returns of up to 51% during the year. Notably, the Mirae Asset NYSE FANG+ ETF led with a 50.90% return, while other top performers included healthcare and CPSE ETFs.

The expense ratios for passive index funds remained low, ranging from 0.10% to 0.50%, compared to 1.5% to 2% for actively managed funds. This cost efficiency contributed to higher net returns for investors choosing passive funds.

📉 Underperformance of Actively Managed Funds

In 2024, many actively managed large-cap mutual funds underperformed their benchmark indices. For instance, the average return for large-cap mutual funds was 19.72%, while their benchmarks, NIFTY 100 - TRI and BSE 100 - TRI, offered returns of 18.21% and 18.24%, respectively.

The Nifty 50 index delivered a return of 8.8% in 2024, reflecting a challenging year for Indian equities due to factors like slowing corporate Earnings and significant foreign fund outflows

Passive Funds - Safe Heaven Amidst Coronavirus Pandemic

With the current situation across the globe, the financial markets are facing issues of deep concern. While investors were willing to take a risk in the past, today’s conditions have pushed the majority of the investors to look for a Safe Haven. This means they are looking for an investment that will yield higher returns or at least stable returns.

Several investors are now looking to invest through passive modes such as exchange-traded funds or index funds. As per AMFI, Inflow into the index funds faced an all-time high of Rs. 2076.5 crore in March 2020.

Passive Funds Vs Active Funds

There are specific differences in the way they function and affect the investor.

The tabular differentiates between passive funds and active funds:

Risks of Investing In Index Funds

No Flexibility of Index Mutual Funds

One major disadvantage is the lack of flexibility. Since the funds only track the index, they may miss out on opportunities for higher returns that arise from market anomalies. Typically, value stocks that are not part of the index can be excluded from such portfolios.

Market Risk on Index Mutual Funds

These funds are directly linked to market performance. So, when the stock market falls, the value of the index mutual fund also falls. Despite this, top index funds can still be beneficial for investors seeking equity exposure with lower management risk. Experts suggest allocating 5-6% of your portfolio to index funds for balanced growth.

Why Passive Index Funds Are Better?

The impressive growth in passive investment options, such as gold ETFs and index funds, underscores a significant trend: investors are increasingly gravitating toward cost-efficient, low-maintenance avenues to participate in market movements. For instance, gold ETFs, much like passive index funds, offer a streamlined way to mirror market performance without the complexities of active management.​

In 2024, passive index funds demonstrated remarkable performance:​

• Over 300 passive mutual funds delivered returns of up to 51%. The Mirae Asset NYSE FANG+ ETF led with a 50.90% return, followed by Motilal Oswal BSE Healthcare ETF at 40.61%, and CPSE ETF at 37.80%.

• The Nifty 50 index achieved a return of 13.72%, while the BSE Sensex posted a 13.29% return.

These figures highlight the potential of passive funds to deliver competitive returns. Moreover, passive index funds typically have lower expense ratios, ranging from 0.10% to 0.50%, compared to 1.5% to 2% for actively managed funds. This cost efficiency can significantly boost net returns over time.

In terms of investor behavior, 2024 saw substantial inflows into passive funds:

• Passive funds recorded net inflows of ₹1.32 lakh crore. Equity and debt ETFs saw net inflows of about ₹69,800 crore, while index funds attracted ₹53,700 crore.
• The Assets Under Management (AUM) for passive mutual funds surged to ₹11 lakh crore by September 2024, marking a 1.5x increase from the previous year.

These trends indicate a growing preference among investors for passive investment strategies, driven by their simplicity, transparency, and cost-effectiveness.

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FAQs

1. Why should you invest in index mutual funds?

A: If you want to make a long-term investment, then you can consider index funds. These funds track the composition and behaviour of major indices like the NSE Nifty and BSE Sensex. Since they are structured based on the performance of multiple companies, they reduce individual stock risk and offer stable growth potential.

2. How to select a particular index MF?

A: Choose an index mutual fund based on long-term performance, tracking error, expense ratio, and fund house reputation. Some reliable fund houses include SBI, LIC, ICICI Prudential, UTI, and others.

3. What is the main advantage of investing in an Index fund?

A: Index funds are passively managed, which results in lower expenses. The total expense ratio (TER) is significantly lower than actively managed funds, often ranging between 0.2% to 0.5%.

4. Do Passive Index Funds guarantee returns?

A: No, they don’t guarantee returns. These funds mirror their benchmark index, which is subject to market fluctuations.

5. Do Passive Index Funds pay dividends?

A: Some index funds offer dividend options, but most investors opt for the growth option where returns are reinvested for compounding benefits.

6. How do Index Funds add to diversification?

A: Index funds invest in a broad Range of companies that form the index. This built-in diversification reduces the risk of losses due to underperformance of any single company.

7. When should you consider investing in Index funds?

A: Index funds are suitable when you have a long-term investment horizon of at least 5 years and want to avoid stock picking or high management fees.

8. Is there some way that I can select the best Index fund?

A: If you're a beginner, consult a financial advisor or use reliable financial platforms that compare fund performance, expense ratios, and tracking errors to help you choose.

9. Who is ideally suited to invest in Index Funds?

A: Index funds are ideal for risk-averse investors seeking low-cost, diversified exposure to the equity market without the need for active management.

By Rohini Hiremath

Rohini Hiremath works as a Content Head at Fincash.com. Her passion is to deliver financial knowledge to the masses in simple language. She has a strong background in start-ups and diverse content. Rohini is also an SEO expert, coach and motivating team head!

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