What is an Index Mutual Fund?

An index mutual fund is a type of mutual fund designed to replicate the performance of a specific market index. It holds a portfolio that mirrors the index’s composition, including the same equities and their respective weightages. Index mutual funds in India offer a standardised way to track the overall performance of your investments. 

This passive investment offers various benefits to investors, given its broad exposure to the equity market, with lower operating expenses and portfolio turnover. Many investors consider it a valid investment option to ideate a long-term investment portfolio.

Valid Reasons to Invest in Index Mutual Funds

The three key benefits of investing in index mutual funds are listed below:

1. Low fees and expense ratio: Compared to actively managed funds, index funds have lower expense ratios. This means you can rightly invest more of your money in places that can benefit your portfolio.

2. Tax benefits: As index mutual funds are passively managed, there is no need to buy and sell individual securities frequently. This further reduces tax liabilities and can offer beneficial after-tax returns over time.

3. Easy to handle: Index funds are easier to manage than actively managed mutual funds. This is quite possible as the funds do not easily change their asset allocations. Your investment in an index fund shall remain the same until you decide to change the fund yourself.

The List of Best Performing Index Mutual Funds in India 

The index mutual funds provide accountable growth for both new and experienced investors. Following is a list of top-performing index mutual funds in India based on annualised return of monthly SIP worth ₹10,000 for five years as of December 14, 2024.

Index Fund	AUM	Return p.a.	Expense Ratio
Motilal Oswal Nifty Midcap 150 Index Fund	₹1,986 crores	+28.53%	0.30%
Motilal Oswal Nasdaq 100 FOF Scheme	₹5,469 crores	+53.15%	0.24%
Axis Nifty 100 Index Fund	₹1,710 crores	+15.92%	0.21%
Bandhan Nifty 50 Index Fund	₹1,645 crores	+12.60%	0.1%
UTI Nifty 50 Index Fund	₹20,083 crores	+12.66%	0.18%

Source: Value Research

Differences between Active Mutual Fund and Index Mutual Fund 

Mutual funds and index mutual funds sport different investment and management styles that can certainly affect their cost and performance. The following table holds onto the differences between them based on various particulars. 

Particulars	Index Mutual Funds	Active Mutual Funds
Investment and Management Style	Investors seeking a passive investment strategy with minimal intervention from the fund manager choose index funds.	Active mutual funds on the other hand require a fund manager to manage and select securities that can outperform the market actively.
Expense Ratio	Index funds hold onto lower expense ratios that further increase the investor’s overall returns and translate to cost-saving.	Active mutual funds hold onto higher expense ratios, mainly due to the active management done by the fund manager, which further reduces the overall returns for the investor.
Performance	With lower expenses and a passive investment strategy, index funds deliver reliable long-term performance.	Although active mutual funds have the potential to outperform the market, the higher fees charged to cover active management handled by the fund manager can certainly erode the overall returns.

Differences Between Index Fund and ETF

Index funds and ETF are popular passive investment schemes among investors. The following table describes the differences between them based on various factors.

Particulars	Index Fund	ETF
Demat Account Requirement	A demat account is not required to trade in index funds.	ETF trading requires a demat account.
SIP Investment	Investors can invest in index funds through SIPs.	Investors do not get an option to invest through SIPs in an ETF.
Expense Ratio	Holds onto higher expense ratios.	Holds onto lower expense ratios.
Fund Management	Managed by fund managers.	ETFs provide investors with flexible trading options.
Valuation of Funds	Index funds valuation is done at the end of the day.	ETF valuation is done continuously.

Before investing in index mutual funds, you must be aware of the fund in terms of fund manager, performance, and more to make informed investment decisions. 

Factors to be Considered Before Investing in Index Mutual Funds

• Return Volatility: If the equity stock prices in an index face a fall, then the index funds shall follow the same. This way, the benchmark chosen to replicate will also have a big impact on the return volatility of the scheme. Such risks found in short-term volatility make index mutual funds less suitable for investing lump-sum amounts, especially for the short term. 

• Low Flexibility: By mirroring the index, the index fund investors are limited to picking specific stocks. This kind of selection is liable and remains unchanged unless a change occurs in the index itself. It shall further reduce the investor’s flexibility.

• Business or Governance Risks: Long-term returns under equity investments come from the quality of the companies you hold in your portfolio. The quality here means how the company has been defined regarding capital ratios, profitability, corporate governance, resilience to competition, and balance sheet strength. Index investments shall never guard against a company slipping off any of the above-mentioned factors. 

Conclusion

Knowing index mutual funds and their possibilities will ultimately open doors to a more disciplined and intelligent investing style. Although day trading could appear interesting for fast profits, index funds offer a consistent long-term investment plan that lets your portfolio increase consistently over time. Index funds might be a great alternative for those seeking a balanced, passive investment with low management fees, wide market exposure, and inflation-beating potential. Index mutual funds can help you increase money in a more predictable, low-risk way whether your level of understanding about investing or building on past experience.

FAQs

1. What is the difference between a mutual fund and an index fund?

In management, mutual and index funds differ mostly in their structure. While index funds do not call for any type of human control to choose between purchasing and selling alternatives, mutual funds need active management. Considering their reduced fees and cost ratios, index funds also are more reasonably priced than mutual funds. 

2. What is an index in a mutual fund?

An index in a mutual fund represents the market index that a mutual fund tends to replicate regarding asset and portfolio allocation. The fund manager shall invest in the same securities as present in the index and in the same proportion, which does not change the portfolio compositions. 

3. What is a disadvantage of a mutual index fund?

The mutual index fund does not aim to outperform the benchmark index, and in certain market conditions, it can even reduce return potential. With poor personalised management, mutual index funds might be a drawback for investors who seek active involvement in their investments. 

4. What is an index fund and how does it work?

Like BSE Sensex, NSE Nifty, etc., index mutual funds invest in stocks that copy the stock market index. This passively managed kind of fund lets the fund manager invest in the securities as in the underlying index in the respective proportion, so maintaining the general composition of the portfolio without any change. For example, an index fund that is tracking the NSE Nifty Index and hosting 50 stocks in the portfolio will have similar propositions. 

5. What are the big 3 index funds?

The three index funds recognised as cost-effective for investors and with long-term development offerings are Motilal Oswal Nifty Midcap 150 Index Fund, Axis Nifty 100 Index Fund, and Motilal Oswal Nasdaq 100 FOF Scheme. For those trying to equal the market performance instead of exceeding it, all three index funds have been the perfect fit.