A mutual fund that replicates the portfolio of an index is known as index funds. These funds are also known as passive funds or index-tied or index-tracked funds.

How much Should You Invest in an Index Fund?

We believe an individual can begin with 20% exposure to such funds and gradually increase it to 50% or even higher if the trend of active fund managers is failing to beat index become prominent over time.

Best Index Funds of 2019 - At a Glance
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
SBI Nifty Index Fund - Direct - Growth 7.8% 14.1% 10.36% 0.26% 99% Others
(Index)
Moderately High
UTI Nifty Index Fund - Direct - Growth 7.96% 14.25% 10.71% 0.1% 18% Others
(Index)
Moderately High
ICICI Prudential Nifty Next 50 Index Fund - Direct - Growth -9.23% 11.35% 12.51% 0.39% 55% Others
(Index)
Moderately High
HDFC Index Fund - SENSEX Plan - Direct - Growth 15.99% 8.92% 13.41% 0.84846083% 26.67% Others
(Index)
Moderately High
IDFC Nifty Fund - Direct - Growth 7.87% 14.16% 10.66% 0.18% 10% Others
(Index)
Moderately High

Best Index Funds of 2019 – Details

1.SBI Nifty Index Fund

Objective

The fund seeks to adopt a passive investment strategy.

It aims to invest in stocks comprising the S&P CNX Nifty index in the same proportion as in the index with the objective of achieving returns equivalent to the total returns generated by the S&P CNX Nifty index.

Please note, the total returns of an index reflect the returns from index gain/loss plus dividend payments by stocks that are part of the index.

Why Invest in SBI Nifty Index Fund?

The fund has outperformed the benchmark over the past one year period and has a lower risk compared to the benchmark.

Also, the expense ratio is low which enables investors to get the maximum benefit.

Having said that, the fund has an asset under management (AUM) of less than Rs 500 crore which makes the fund’s expense ratio unstable.

Also, the risk-adjusted returns are lower compared to the category average and the long-term (five years) returns are lower than the benchmark.

Other Details
Minimum first investment ₹5000
Minimum second investment ₹1000
Minimum SIP Amount ₹500
Exit Load
If redeemed between 0 Day to 15 Day; Exit Load is 0.2%;
Taxation
15% if redeemed before one year, 10% if redeemed after one year on returns of Rs 1 lakh+ in a financial year.

Fund Manager

Mr. Raviprakash Sharma is the fund manager.

Sharma has extensive experience in Indian markets in various capacities including portfolio management. He previously served as a Senior Manager of Portfolio Management Services at HDFC Asset Management Co. Ltd.,

Financial Advisor at Citigroup Wealth Advisors India Pvt. Ltd., Assistant Vice President of Non-Discretionary PMS at Kotak Securities Ltd., Assistant Vice President in the Fixed Income group at Times Investors Services Pvt. Ltd., Manager in the Fixed Income group at Birla Sun Life Securities Ltd.

Mr. Sharma is a Chartered Accountant and a CFA charter holder. He also holds a B.Com. Degree.

2.UTI Nifty Index Fund

Objective

The fund seeks to invest in stocks listed in the CNX Nifty Index in the same weight as the index.

Why Invest in UTI NIfty Index Fund?

The fund has outperformed the benchmark over the multi-trailing period (one year and three years).

Also, the expense ratio is low which enables investors to get the maximum benefit, and the exit load is zero.
Having said that, the long-term (five years) returns are lower than the benchmark.

Other Details
Minimum first investment ₹5000
Minimum second investment ₹1000
Minimum SIP Amount ₹500
Exit Load
If redeemed between 0 Day to 15 Day; Exit Load is 0.2%;
Taxation
15% if redeemed before one year, 10% if redeemed after one year on returns of Rs 1 lakh+ in a financial year.

Fund Manager

Mr. Kaushik Basu is the Executive Vice President & Fund Manager – Equity at UTI AMC Ltd. With over 32 years of experience, including 18 years in the domestic equity market.

Basu has remained a notable name in the industry. Previously, he worked in the area of accounts and money market of erstwhile Unit Trust of India.

Basu holds a B.Com degree from Kolkata (Calcutta) University and a graduate degree in law (LLB) from Kolkata (Calcutta) University.

He has also completed CS (Int) and CAIIB – Part I.

3.ICICI Prudential Nifty Next 50 Index Fund

Objective

The fund seeks to invest in companies whose securities are included in Nifty Junior Index and aims to achieve the returns of the above index as closely as possible though subject to tracking error.

Why invest in ICICI Prudential Nifty Next 50 Index Fund?

The fund has outperformed the benchmark over the multi-trailing period (three years and five years).

Having said that, the fund has asset under management (AUM) of less than Rs 500 crore which makes the fund expense unstable.

Also, the risk is higher compared to the category average, and the fund has been underperforming over the past year.

Other Details
Minimum first investment ₹5000
Minimum second investment ₹1000
Minimum SIP Amount ₹100
Exit Load
If redeemed between 0 Day to 15 Day; Exit Load is 0.2%;
Taxation
15% if redeemed before one year, 10% if redeemed after one year on returns of Rs 1 lakh+ in a financial year.

Fund Manager

Mr. Kayzad Englim is the fund manager.

Before joining ICICI Prudential AMC, he has worked with IDFC Investment Advisors Ltd., Prime Securities, and Canbank Mutual Fund. Mr. Englim has a B.Com (H) and M Com degree

4.HDFC Index Fund – SENSEX Plan

Objective

The fund seeks to invest between 80 – 90 percent of the money in 30 scrips comprising the S&P BSE Sensex in the same proportion. The balance is invested in other non-index scrips.

Other Details
Minimum first investment ₹5000
Minimum second investment ₹1000
Minimum SIP Amount ₹100
Exit Load
If redeemed between 0 Day to 15 Day; Exit Load is 0.2%;
Taxation
15% if redeemed before one year, 10% if redeemed after one year on returns of Rs 1 lakh+ in a financial year.

Fund Manager

Mr. Krishan Daga is the fund manager.

Previously he was the Head of ETFs at Reliance Capital Asset Management Limited. Dafa also gained significant experience on the sell side of Indian equity markets.

Why Large-Cap Funds Perform Better Than Index Funds?

Mr. Daga also had stints with Deutsche Securities and B&K Securities, Brics Securities, JP Morgan Securities, HSBC Securities.Mr. Daga received a B.Com degree from Rampuria College, the University of Rajasthan in 1989.

5.IDFC Nifty Fund

Objective

The fund seeks to replicate the S&P CNX Nifty index by investing in securities of the S&P CNX Nifty Index in the same proportion.

Why Invest in IDFC Nifty Fund?

The fund has outperformed the benchmark over the past one year period and has a lower risk compared to the benchmark. Also, the expense ratio is low which enables investors to get the maximum benefit.

Having said that, the fund has asset under management (AUM) of less than Rs 500 crore which makes the fund expense unstable.

Also, the risk-adjusted returns are lower compared to the category average and the long-term (five years) returns are lower than the benchmark.

Other Details
Minimum first investment ₹100
Minimum second investment ₹100
Minimum SIP Amount ₹100
Exit Load
If redeemed between 0 Day to 15 Day; Exit Load is 0.2%;
Taxation
15% if redeemed before one year, 10% if redeemed after one year on returns of Rs 1 lakh+ in a financial year.

Fund Manager

Sumit Agrawal and Arpit Kapoor manage the fund.

Mr. Sumit Agrawal

He is a CFA and is the Vice President of Fund Management at IDFC Asset Management Company Limited. Before this, he has worked at Mirae Asset Mutual Fund, Axis Capital, JP Morgan India Services Pvt. Ltd. Mr. Agrawal received a

Post Graduate Diploma in Management in Finance from Symbiosis Centre For Management and Human Resource Development.

He is a CFA charter holder and is also a Company Secretary affiliated with Institute of Company Secretaries of India.

Agrawal holds a Bachelor Degree in Commerce from Devi Ahilya University, Indore.

Mr. Arpit Kapoor

He is the Associate Vice President of Fund Management at IDFC Asset Management Company Limited.

Before this, he worked with UTI Asset Management Company (P) Ltd., Mobintech A/S, Torry Harris Business Solutions.
Kapoor received a P.G.D.M. in finance and strategy from the Indian Institute of Management, Kozhikode and an M.B.A. from Copenhagen Business School.

Previously, Kapoor graduated with a B.Tech. In Electronics and Communication from JSS Academy Of Technical Education, Noida.

Bonus List
Fund Name 1Y 3Y 5Y Expense Ratio Turnover Ratio Category Risk
Franklin India Index Fund - NSE Nifty Plan - Direct - Growth 7.33% 13.49% 10.22% 0.65% 4% Others
(Index)
Moderately High
ICICI Prudential Nifty Next 50 Index Fund - Direct - Growth -9.23% 11.35% 12.51% 0.39% 55% Others
(Index)
Moderately High
DSP Equal Nifty 50 Fund - Direct - Growth 0.27% NA NA 0.39% NA Others
(Index)
Moderately High

What are Index Funds?

open-vs-close-ended-funds difference

open vs close ended funds difference

Index funds, as the name suggests, invest in an index.

These funds seek to invest in all the underlying securities in the same proportion as that of an index. The objective of an index fund is to replicate the performance of the index.

In emerging markets such as India, index funds have not generated much popularity. However, studies suggest that it is nearly impossible to beat the benchmark index year after year. Thus, it makes sense to diversify investments through index funds.

The success of the index fund is determined by how close it is able to replicate the performance of the underlying index it is copying. This is measured by tracking error. Thus, the lower tracking error indicates that the fund is better.

An investor should invest in index funds should they have any reservations with respect to the ability of a fund manager in generating alpha over the benchmark returns.

Further, if an investor is looking to play a low-cost strategy, index funds are best suited. Furthermore, index funds are also helpful to remain fully invested in equity at all times. For investing in an index fund, an investor has three options generally:

  • A fund that tracks the Sensex – 30 stocks
  • A fund that tracks the Nifty – 50 stocks
  • Index plus fund – Fund invests a portion in an index and remainder is actively managed

Advantages of Index funds

1.Suitable for the Efficient Market

As markets become efficient, it gets difficult for fund managers to beat their benchmarks. In this scenario, passive funds become the preferred investment vehicle.

2.Low Expense Ratio

One of the critical features of the passive fund is low cost. And this is one of the main reasons why investors prefer  index funds

3.No Stock-Specific Risk

Given you invest in a basket of securities, you tend to bet on the broader market or asset class. The single stock exposure in case of the index is limited, thereby causing limited damage.

The Disadvantages

No Alpha or Outperformance

Active fund managers seek to outperform the benchmark index.

Thus, if you have invested in passive funds, do not expect any outperformance as these funds are not actively managed and are only a replica of the index.

Conclusion

The investment decision is a function of risk appetite and investment goals. Index funds are suitable for investors who are risk-averse and are looking for predictable returns.

These funds do not involve extensive tracking either.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww