Index Funds and ETFs in India: Complete Beginner's Guide
Learn about index funds and ETFs in India. Compare Nifty 50, Sensex, and other index funds. Understand costs, tracking error, and how to invest in passive funds.
Kiran’s Simplification
Kiran spent 3 years picking stocks. He researched companies, analyzed balance sheets, and followed market news daily. His result? 8% annual return.
His friend Arjun simply invested in a Nifty 50 index fund every month. No research, no stress. His result? 12% annual return.
“How is this possible?” Kiran asked.
The answer: Most active investors underperform the index. And Arjun let the index work for him.
This guide explains index funds and ETFs—the simplest way to invest.
What is an Index?
Definition
An index is a collection of stocks representing a market segment.
Major Indian Indices
| Index | What It Represents | Stocks |
|---|---|---|
| Nifty 50 | Top 50 large-cap stocks | 50 |
| Sensex | Top 30 large-cap stocks (BSE) | 30 |
| Nifty Next 50 | Stocks ranked 51-100 | 50 |
| Nifty Midcap 150 | Mid-cap stocks | 150 |
| Nifty Smallcap 250 | Small-cap stocks | 250 |
| Nifty Bank | Banking sector | 12 |
| Nifty IT | IT sector | 10 |
How Indices Work
Example: Nifty 50
Top 50 companies by market cap:
- Reliance, TCS, HDFC Bank, Infosys, ITC…
Weighted by Market Cap:
- Larger companies = higher weight
- Reliance might be 10%, smaller company might be 1%
Rebalanced Periodically:
- Poor performers removed
- Better performers added
- Automatic “buy winners, sell losers”
What is an Index Fund?
Definition
A mutual fund that copies an index instead of picking stocks.
How It Works
| Active Fund | Index Fund |
|---|---|
| Fund manager picks stocks | Computer copies index |
| Goal: Beat the index | Goal: Match the index |
| Higher fees (1-2%) | Lower fees (0.1-0.5%) |
| Manager skill dependent | Eliminates manager risk |
Example
Nifty 50 Index Fund:
- Buys all 50 Nifty stocks
- In the same proportion as the index
- If Nifty goes up 10%, fund goes up ~10%
What is an ETF?
Definition
ETF = Exchange Traded Fund
Like an index fund, but trades on the stock exchange like a stock.
ETF vs Index Fund
| Factor | Index Fund | ETF |
|---|---|---|
| Trading | Buy/sell at day-end NAV | Buy/sell anytime like stock |
| Minimum Investment | ₹500-1000 | 1 unit (price varies) |
| Demat Required | No | Yes |
| Expense Ratio | 0.1-0.5% | 0.03-0.3% |
| SIP | Available | Not direct; can manually do |
| Liquidity | Same-day or next-day | Instant (if liquid) |
| Price Discovery | NAV at day end | Real-time market price |
Why Index Funds/ETFs?
The Case for Passive Investing
Data Point: Over 10 years, 80-90% of active fund managers underperform their benchmark index.
Advantages
| Benefit | Explanation |
|---|---|
| Lower Costs | No research team to pay |
| Diversification | Own 50-500 stocks automatically |
| Transparency | Know exactly what you own |
| No Manager Risk | Performance not dependent on one person |
| Simplicity | No stock picking required |
| Tax Efficiency | Lower turnover = fewer capital gains |
The Math of Costs
Over 20 years with ₹10,000/month SIP:
| Expense Ratio | Final Corpus | Difference |
|---|---|---|
| 0.1% (Index) | ₹1.02 crore | - |
| 0.5% (Index) | ₹97 lakh | ₹5 lakh less |
| 1.5% (Active) | ₹85 lakh | ₹17 lakh less |
Assuming 12% pre-fee return
Types of Index Funds in India
By Market Cap
| Type | Index | Best For |
|---|---|---|
| Large Cap | Nifty 50, Sensex | Core holding, stability |
| Large Cap Extended | Nifty 100, Nifty Next 50 | Broader exposure |
| Mid Cap | Nifty Midcap 150 | Growth potential |
| Small Cap | Nifty Smallcap 250 | Aggressive growth |
| All Cap | Nifty 500 | Complete market |
By Sector
| Sector | Index |
|---|---|
| Banking | Nifty Bank |
| IT | Nifty IT |
| Pharma | Nifty Pharma |
| Infrastructure | Nifty Infra |
| FMCG | Nifty FMCG |
By Theme
| Theme | Index |
|---|---|
| Dividend | Nifty Dividend Opportunities 50 |
| Quality | Nifty 100 Quality 30 |
| Value | Nifty 50 Value 20 |
| Low Volatility | Nifty 100 Low Volatility 30 |
| ESG | Nifty 100 ESG |
Best Index Funds in India (2024)
Nifty 50 Index Funds
| Fund | Expense Ratio | AUM | Tracking Error |
|---|---|---|---|
| UTI Nifty 50 | 0.18% | ₹15,000+ Cr | Low |
| HDFC Nifty 50 | 0.20% | ₹10,000+ Cr | Low |
| ICICI Pru Nifty 50 | 0.18% | ₹8,000+ Cr | Low |
| SBI Nifty 50 | 0.18% | ₹5,000+ Cr | Low |
| Nippon Nifty 50 | 0.20% | ₹4,000+ Cr | Low |
Nifty Next 50 Index Funds
| Fund | Expense Ratio | Why Consider |
|---|---|---|
| UTI Nifty Next 50 | 0.27% | Future large caps |
| ICICI Pru Nifty Next 50 | 0.27% | Growth potential |
Other Popular Index Funds
| Category | Fund | Expense |
|---|---|---|
| Sensex | HDFC Sensex | 0.20% |
| Nifty 100 | ICICI Pru Nifty 100 | 0.23% |
| Midcap | Motilal Oswal Nifty Midcap 150 | 0.30% |
| Smallcap | Motilal Oswal Nifty Smallcap 250 | 0.36% |
Best ETFs in India (2024)
Nifty 50 ETFs
| ETF | Expense Ratio | Liquidity |
|---|---|---|
| Nippon Nifty BeES | 0.04% | High |
| SBI Nifty 50 ETF | 0.07% | High |
| ICICI Pru Nifty ETF | 0.05% | Moderate |
| UTI Nifty 50 ETF | 0.07% | Moderate |
Sensex ETFs
| ETF | Expense Ratio |
|---|---|
| HDFC Sensex ETF | 0.05% |
| SBI Sensex ETF | 0.07% |
Sector ETFs
| ETF | Sector | Expense |
|---|---|---|
| Nippon Bank BeES | Banking | 0.19% |
| ICICI Pru IT ETF | IT | 0.24% |
| Nippon PSU Bank BeES | PSU Banks | 0.49% |
Gold ETFs
| ETF | Expense |
|---|---|
| Nippon Gold BeES | 0.59% |
| SBI Gold ETF | 0.55% |
| HDFC Gold ETF | 0.59% |
Index Fund vs ETF: Which to Choose?
Choose Index Fund If
| Your Situation | Why Index Fund |
|---|---|
| Want to SIP | Automatic SIP available |
| No demat account | Doesn’t require demat |
| Lump sum from salary | Easy NAV-based purchase |
| Prefer simplicity | One-click investment |
| Long-term investor | End-of-day pricing is fine |
Choose ETF If
| Your Situation | Why ETF |
|---|---|
| Want lowest expense ratio | ETFs typically cheaper |
| Want intraday trading | Can buy/sell anytime |
| Already have demat | No extra setup needed |
| Lump sum investment | No exit load, flexible |
| Comfortable with trading | Need to place orders |
My Recommendation
| Investor Type | Best Choice |
|---|---|
| Beginners | Index Fund (simpler) |
| SIP investors | Index Fund (auto-SIP) |
| Lump sum investors | Either (prefer ETF for cost) |
| Active traders | ETF |
| Large amounts | ETF (lower expense matters) |
Key Metrics to Evaluate
1. Expense Ratio
What It Is: Annual fee charged by the fund
Impact:
| Expense | 20-Year Impact on ₹1 Cr |
|---|---|
| 0.10% | -₹2 lakh |
| 0.50% | -₹9 lakh |
| 1.00% | -₹18 lakh |
Rule: Lower is better. Aim for <0.3% for index funds.
2. Tracking Error
What It Is: How much the fund deviates from the index
Good: <0.5% Bad: >1%
Causes:
- Cash drag (fund holds some cash)
- Expenses
- Timing of purchases
- Corporate actions
3. AUM (Assets Under Management)
Why It Matters:
- Larger AUM = more stable
- Better liquidity
- Lower impact cost
Benchmark: Prefer funds with >₹1,000 crore AUM
4. Liquidity (For ETFs)
What to Check:
- Daily trading volume
- Bid-ask spread
- Impact cost
Rule: Higher volume = easier to buy/sell at fair price
How to Invest in Index Funds
Method 1: Direct from AMC
- Visit fund house website (utimf.com, hdfcfund.com)
- Complete KYC (one-time)
- Select fund
- Choose SIP or lump sum
- Make payment
Method 2: Via Mutual Fund Platform
Platforms:
- Zerodha Coin (direct funds)
- Groww (direct funds)
- Kuvera (direct funds)
- PayTM Money (direct + regular)
- ET Money (direct + regular)
Process:
- Download app
- Complete KYC
- Select index fund
- Set up SIP or invest lump sum
Direct vs Regular Plans
| Plan | Expense | Who Gets Commission |
|---|---|---|
| Direct | Lower | No one |
| Regular | Higher | Distributor gets commission |
Always choose Direct plans for index funds—no advice needed.
How to Invest in ETFs
Requirements
- Demat account
- Trading account
- Funds in trading account
Process
- Login to broker (Zerodha, Groww, Upstox)
- Search for ETF (e.g., “Nifty BeES”)
- Check current price and volume
- Place buy order (market or limit)
- ETF units credited to demat
Tips for ETF Buying
| Tip | Why |
|---|---|
| Use limit orders | Avoid paying above NAV |
| Check bid-ask spread | Lower spread = better pricing |
| Avoid illiquid ETFs | Hard to exit at fair price |
| Don’t pay premium | ETF price should be ≈ NAV |
Building a Portfolio with Index Funds
Simple Portfolio 1: Single Fund
For: Beginners, <₹5 lakh investment
| Fund | Allocation |
|---|---|
| Nifty 50 Index Fund | 100% |
Simple Portfolio 2: Core + Satellite
For: Intermediate, ₹5-20 lakh
| Fund | Allocation | Purpose |
|---|---|---|
| Nifty 50 Index | 70% | Core stability |
| Nifty Next 50 | 30% | Growth kicker |
Diversified Portfolio 3
For: Advanced, >₹20 lakh
| Fund | Allocation | Purpose |
|---|---|---|
| Nifty 50 Index | 50% | Large cap core |
| Nifty Next 50 | 20% | Extended large cap |
| Nifty Midcap 150 | 20% | Mid cap growth |
| Nifty Smallcap 250 | 10% | Small cap alpha |
Adding International
| Fund | Allocation |
|---|---|
| India Index Funds | 80% |
| Nasdaq 100 Fund of Fund | 20% |
SIP in Index Funds
Why SIP Works
| Benefit | Explanation |
|---|---|
| Rupee Cost Averaging | Buy more when cheap, less when expensive |
| Discipline | Automatic, removes emotion |
| Small Amounts | Start with ₹500/month |
| Compounding | Long-term wealth creation |
SIP Calculator Example
Assumptions:
- Monthly SIP: ₹10,000
- Return: 12% p.a.
- Period: 20 years
Result:
- Total Investment: ₹24 lakh
- Expected Value: ₹1 crore+
- Wealth Created: ₹76 lakh
Best Day for SIP
Research shows: Day of month doesn’t matter much.
Tip: Choose a day after your salary credit for convenience.
Common Mistakes to Avoid
Mistake 1: Chasing Sector ETFs
Wrong: “IT is doing well, let me buy IT ETF” Reality: By the time you notice, rally may be over
Mistake 2: Over-Diversification
Wrong: 10 different index funds for ₹5 lakh Reality: Nifty 50 + Next 50 covers most large/mid caps
Mistake 3: Ignoring Tracking Error
Wrong: Choosing fund only by expense ratio Reality: High tracking error can cost more than expense savings
Mistake 4: Timing the Market
Wrong: “I’ll invest when market corrects” Reality: Time in market beats timing the market
Mistake 5: Stopping SIP in Crashes
Wrong: “Market crashed, let me stop SIP” Reality: Crashes are when SIP works best (buying cheap)
Index Funds vs Active Funds
Performance Comparison (India, 10 Years)
| Category | Index Beat Active % |
|---|---|
| Large Cap | 60-70% of time |
| Mid Cap | 50-60% of time |
| Small Cap | 40-50% of time |
When Active Might Work
| Scenario | Why Active Could Win |
|---|---|
| Mid/Small Cap | Less efficient markets |
| Specific Expertise | Fund manager has edge |
| Concentrated Bets | High conviction picks |
When Index Definitely Works
| Scenario | Why Index Wins |
|---|---|
| Large Cap | Very efficient market |
| Long Term | Costs compound against active |
| Core Portfolio | Reliable, predictable |
Tax Treatment
Equity Index Funds/ETFs
| Holding Period | Tax Rate |
|---|---|
| < 1 year (STCG) | 15% |
| > 1 year (LTCG) | 10% above ₹1 lakh |
LTCG Harvesting
Strategy: Sell after 1 year to book ₹1 lakh tax-free gains annually.
Example:
- Invested ₹5 lakh, now worth ₹6.5 lakh
- Gain: ₹1.5 lakh
- Sell to book ₹1 lakh gain (tax-free)
- Reinvest immediately
- New cost basis is higher
Building Your Index Fund Strategy
For ₹10,000/Month SIP
| Age | Nifty 50 | Nifty Next 50 | Midcap 150 |
|---|---|---|---|
| 25 | ₹5,000 | ₹3,000 | ₹2,000 |
| 35 | ₹6,000 | ₹2,500 | ₹1,500 |
| 45 | ₹7,000 | ₹2,000 | ₹1,000 |
Increase SIP Annually
Rule: Increase SIP by 10% each year with income growth.
| Year | SIP | After 10 Years Impact |
|---|---|---|
| Start | ₹10,000 | Base |
| +10%/year | ₹10,000 → ₹25,937 | +40% more corpus |
Action Plan
Week 1: Setup
- Choose a platform (Zerodha Coin, Groww, Kuvera)
- Complete KYC if not done
- Select Nifty 50 index fund (UTI or HDFC)
Week 2: Start
- Set up SIP (even ₹500 to start)
- Choose SIP date (after salary)
- Enable auto-pay
Month 2+: Build
- Increase SIP as comfortable
- Add Nifty Next 50 for growth
- Stay invested through volatility
Annually: Review
- Check tracking error
- Compare expense ratios
- Increase SIP with income
- Don’t churn unnecessarily
Resources
Where to Research
| Resource | Use |
|---|---|
| Value Research | Fund comparison |
| Morningstar India | Ratings and analysis |
| NSE India | Index methodology |
| AMC Websites | Fund documents |
Tools
| Tool | Purpose |
|---|---|
| SIP Calculator | Project future value |
| Goal Planner | How much SIP needed |
| Fund Comparison | Compare expenses, returns |
Risk Disclaimer
Index funds carry market risk. Past performance doesn’t guarantee future results. When the index falls, your investment falls proportionally. Invest based on your risk tolerance and goals. Consider consulting a SEBI-registered advisor for personalized advice.
Summary
Index funds and ETFs offer:
- Simplicity: No stock picking needed
- Low Cost: Expense ratios 0.1-0.3%
- Diversification: 50-500 stocks in one fund
- Performance: Beat most active funds over time
- Transparency: Know exactly what you own
For most investors, a simple Nifty 50 + Nifty Next 50 combination handles equity investing beautifully. Start a SIP, stay invested, and let compounding work.
Social Media Posts
LinkedIn: “My friend spent 3 years picking stocks. Returns: 8%. I invested in Nifty 50 index fund. Returns: 12%. The difference? He paid 1.5% in fees + time. I paid 0.2%. Over 20 years, that gap becomes life-changing. Simplicity wins. #IndexFunds #PassiveInvesting”
Twitter/X: “Index fund investing in India:
✅ UTI/HDFC Nifty 50: 0.2% expense ✅ 50 largest companies owned ✅ Auto-diversified ✅ Beats 70% of active funds
Stop picking stocks. Start a SIP. Let compounding work. #IndexFunds”
Instagram: “Index Fund vs Active Fund 📊
🏆 Index: 0.2% fee, owns top 50 companies 💰 Active: 1.5% fee, manager picks stocks
Over 20 years with ₹10k SIP: Index: ₹1.02 Cr Active: ₹85 Lakh
₹17 LAKH difference! 😱
Keep it simple. Keep the money. 💪
#IndexFunds #InvestingTips”