Index Mutual Funds

Things to consider before investing in Index Funds

• Returns - Index funds replicate the performance of an index but in many instances, there may be a slight deviation from the returns offered by the index which is known as the tracking error. A lower tracking error is an indication of better fund performance. Before you invest in any index fund, it is imperative that you choose the one which has the minimum tracking error.
• Risk - Index funds are less vulnerable to volatility and risks associated with equity as they copy an index. Hence, they are ideal in times of a market rally and can fetch attractive returns. Do remember that during a market downturn, the valuation of index funds may go down. Therefore, it is advised that you have a mix of index funds and actively-managed funds in your portfolio.
• Investment horizon - For index funds to reach their full potential, one must invest in them for at least 7 years as the funds may face fluctuations when invested in for a short term. Only over the long run, returns in the range of 10% to 12% can be expected. Hence, this fund is ideal for investors who are looking at a long term investment horizon.
• Cost - Index funds tend to have a lower expense ratio that can go up to 0.5% when compared to the expense ratios of actively-managed funds that can range between 1% to 2.5%. While choosing an index fund, you should always go for the one with a lower expense ratio as it will marginally deliver higher returns.
• Tax on gains - Redemption of the units of index funds will earn you capital gains which are taxable and is dependant on the duration of investment. If the gains are held for a period of 1 year, they will attract the Short Term Capital Gains Tax (STCG) of 15%. Any gains held for longer than 1 year will attract the Long Term Capital Gains (LTCG) of 10% if the gains are more than Rs.1 lakh.

Top Index Funds in India

While choosing an index fund to invest in, it is important to keep in mind your investment goals, investment horizon, and risk appetite. To help you pick the right index fund, we have provided you with a list of the top index funds in India, based on the returns delivered over a 5-year period.

• UTI Nifty Index Fund - Direct - Growth - This fund was launched on 6 March 2000 and as on 31 October 2018, has achieved returns of 1.56% and 11.37% over a 1-year and 5-year period respectively. The fund has Nifty 50 as its benchmark index. The minimum investment for the scheme is Rs.5,000 and the scheme is managed by Mr. Kaushik Basu and Mr. Sharwan Kumar Goyal.
• ICICI Pru Nifty Next 50 Index Fund - Direct - Launched on 25 June 2010, the scheme has offered returns of 17.50% over a 5-year period. The fund manager of the scheme is Mr. Kayzad Eghlim and the minimum investment amount is Rs.5,000.
• IDFC Nifty Fund - The fund was launched on 30 April 2010 and as on 19 November 2018, has delivered returns of 12.6% over a 5-year period. Investors can subscribe to the units of the fund for as low as Rs.100. Mr. Sumit Agarwal and Mr. Arpit Kapoor are the fund managers of the scheme.
• HDFC Index Fund Sensex Plan - Direct - This fund was launched on 17 July 2002 and since then it has delivered returns of 14.94%. As on 19 November 2018, the fund has achieved returns of 12.5% and 12.4% over a 3-year and 5-year period respectively. Mr. Krishan Kumar Daga is the fund manager for the scheme.
• SBI Nifty Index Fund - Launched on 17 January 2002, the fund has managed to deliver returns of 13.9% as on 13 November 2018 (regular plan - direct option). Over a 3-year and 5-year period, the fund has delivered returns of 9.24% and 10.6% respectively. Mr. Raviprakash Sharma has been managing the scheme since February 2011.

Who should invest in Index Funds?

As mentioned above, index funds can be a good option for investors who have a low risk appetite and wish to enjoy predictable returns. It is also ideal for investors with the below-mentioned characteristics:

1. Investors who do not wish to invest time in extensive tracking.
2. Investors who are content with returns that are equivalent to the Sensex or Nifty index.
3. Investors seeking to diversify their investment portfolios.
4. Investors who are looking at cost-efficient and moderate returns on their mutual fund investments over the long term.