How to Invest in Index Funds in India (Nifty & Sensex)

90% of mutual funds follow an active investing style.

Where the fund manager does extensive research to find assets and stocks that will beat the market returns.

The remaining 10% are – Index funds.

Index funds follow a completely different – “Passive investment” style. Where the fund manager invests in the same stock as contained in the index.

What are Index Funds

The index fund’s portfolio consists of the same stocks that are included in the underlying index, in the exact same proportion.

Index funds copy the movement of a particular index.

The underlying benchmark index can be Nifty 50, Sensex 30, Nifty 100 or Nifty Next 50. For example, below is the weight of the top 10 companies in Nifty 50.

NSE top shares by weightage

Index funds put all of the money in the same stocks that the index tracks. The amount of money invested in each stock is also in the same proportion as the index.

You can see that the ICICI Prudential Nifty Index Fund portfolio has investment in shares in the same proportion (weights) as Nifty 50.

ICICI Prudential Nifty 50 Index Fund

Nifty or Sensex is the common benchmark that most index fund follows.

A few other popular indexes are

  • Nifty Bank index
  • Nifty Midcap 
  • Nifty 100
  • Nifty Smallcap
  • Nifty Next 50

Things You Should Know Before Investing in Index Fund

If you want to invest in equities but do not want to expose yourself to the risks associated with the wrong selection of an individual stock then you can invest in a Nifty or Sensex index fund.

Index funds minimize portfolio risk by investing in multiple stocks across different sectors.

The best part is that your portfolio is protected from the underperformance of any single stock because some other stocks in the index will be performing well. This way, you can expect a more stable return on your investment if the overall market is going up.

But if you’re looking for high-risk high-return then you should research equity mutual funds that may perform better than the overall market.

With Index fund investment there is no need for your to sit infront of PC and track markets like in intraday trading.

Your returns are fixed and in line with the returns given by benchmarked Nifty 50 or Sensex.

Different Types of Index Funds in India

#1. Nifty Index Funds – Nifty index funds track the performance of the Nifty 50 index. This is similar to investing in Nifty, which consists of the top 50 companies listed on the National Stock Exchange (NSE).

#2. Sensex Index Funds – Sensex index funds track the performance of the Sensex 30. Here you invest in the top 30 companies listed on the Bombay Stock Exchange (BSE).

#3. Sectoral Index Funds – Sectoral index funds track the performance of a specific sector, such as banking, technology, or healthcare.

For example, the Motilal Oswal Nifty Bank Index Fund is a sectoral index fund that is based on the Nifty Bank index.

Benefits of Investing in Index Funds

  • Index Funds are passively managed
  • Index funds have a low expense ratio
  • The funds are free from individual human bias
  • Index Funds offer diversification benefits
  • Index Funds are easy to understand when compared to other mutual fund investments
  • Index Funds don’t have the risk of underperformance

Difference Between Index Fund and Mutual Fund

ParticularsIndex FundMutual Fund
Investment StylePassive fund managementDecided by fund manager
Expense RatioLow 0.10% to 0.50%High upto 2%
ObjectiveReplicate index performanceOutperform the benchmark 
Investment portfolioFixedKeeps changing 
ReturnsAlmost the Same as Market ReturnsExpected to Beat Market Returns

How to Invest in Nifty 50 (Index Funds) for Long-Term

Low expense ratios make index funds a better option for investors who want to accumulate wealth in the long term.

The low expense ratio is because index funds follow a fixed investment portfolio in stocks that are similar to indices.

List of Top Index Funds in India

Details of Index funds in India are available on the NSE website as under:

NSE - List of Top Index funds in India

Top 5 Index Funds in India at present are

  • Bandhan Nifty 50 Index Fund
  • Motilal Oswal Nifty 50 Index Fund
  • UTI Nifty 50 Index Fund
  • SBI Nifty Index Fund
  • HDFC Nifty 50 Index Fund

The above list is based on the past 5 years’ annualized returns.

You can check here – the list of Top 5 Index Funds in India with their Expense Ratios.

Step 1 – Choose an Investment Platform

Best index fund investment platforms in India are:

  • Zerodha Coin
  • Groww
  • Scripbox
  • FundsIndia
  • IND Money

If you already have a demat & trading account then chances are that your broker also provides investment in the index funds.

Stockbrokers like Zerodha (read Zerodha Review), Motilal Oswal, and ICICI Direct through their platform offer direct investment in index fund facilities.

Step 2 – Pick the Right Index Fund

Comparison of the present top 5 index funds is below:

Index Fund5 Year Annualized ReturnsExpense RatioAUM
Bandhan Nifty 50 Index Fund16.55%0.101645 Cr
Motilal Oswal Nifty 50 Index Fund16.53%0.15586 Cr
UTI Nifty 50 Index Fund16.52%0.1820,083 Cr
SBI Nifty Index Fund16.48%0.208,679 Cr
HDFC Nifty 50 Index Fund16.47%0.2018,412 Cr

At present “Bandhan Nifty 50 Index fund” gave the highest 16.55% returns. It has the lowest 0.10 expense ratio and a decent fund size of 1,645 Crores.

Top index fund in India - Bandhan Nifty 50 Index fund

Step 3 – Index Fund Investment

I am using the Zerodha Coin platform to show you how to invest in the index fund but you can use any mutual fund investment platform.

Type the name of the index fund using the top right search option.

Select the Nifty 50 plan Index Fund as shown below.

Invest in Index Funds in India Through Zerodha Coin

You have the option to invest by making a single lump sum payment or do a monthly SIP.

Monthly SIP is better for salaried people who want to invest a small amount every month. Lumpsum investment is better for small business owners who expect 1-2 big money inflows in a year.

Index fund - Option to SIP or Lumpsum investment

Click the Buy option and a pop-up form will appear as shown under:

Invest in Index Fund - Nippon India

You will be directed to the payment page when you click the “Buy now” button. Follow the instructions and provide OTP to transfer funds.

Once you have completed the payment, the details of your order will be as shown below:

Invest in Index Fund in India

The units of the index fund purchased will be credited to your account the next day (T+1 day), evening after 7 PM.

How to Invest in Index Funds in India Through Zerodha Coin

To invest in index funds through Zerodha Coin, follow the below-given steps:

#1. Open a Zerodha Trading and Demat Account

Go to the Zerodha website for an account opening. 

Enter your phone number, email ID, and name to allow account opening.

#2. Complete the KYC Process

Provide your PAN & Aadhar number as identity and address proof. Zerodha will guide you through the process and provide you with the required instructions.

#3. Activate Zerodha Coin

Click here to go to the Zerodha Coin platform

Log in using your Zerodha User ID and password. This will also activate your Zerodha Coin platform. 

You can invest in index mutual funds only if your Zerodha Coin account is activated. 

#4. Fund Your Zerodha Account

Transfer funds into your Zerodha Coin account for buying index funds using UPI or through net banking. 100 rupees is the minimum investment amount in index funds.

#5. Explore Available Index Funds

There is a list of all the available index funds on the Coin Dashboard. You can explore fund composition, review historical performance and check expense ratio by clicking the fund. 

#6. Place a Buy Order

Specify the amount you wish to invest in the index fund and click on the “Buy” option.

You will receive confirmation once your order is executed. The index fund units you purchased will be allocated to your demat account. 

You can check the below video for index fund investing on Zerodha Coin.

The steps are more or less similar in case you are using a different platform like Groww, Paytm, Kuvera, or Scripbox.

Look here for other – Best Demat account options.

Drawbacks of Investing in Index Funds

#1. Risk of Tracking Error

Tracking Error arises due to minor differences in the composition of the index fund. Tracking errors can range from 0.03% to 0.16%.

Index share weight changes and corporate actions like bonus share issues cause tracking errors. Tracking error results in a slightly different return when compared to that of the benchmark index.

#2. Index Fund Doesn’t Offer Flexibility to the Fund Manager

An index fund has to be fully invested at all points in time. Even in extreme market upsides & downsides. 

The index fund manager has no flexibility to hold cash in a bearish market or increase allocation in high beta stocks in a bull market.

#3. Index Funds are Likely to Underperform

India has a developing stock market. This gives an opportunity to find undervalued stock. Active mutual funds invest in such undervalued stocks to generate higher returns by taking additional risks. 

In comparison to that – index funds simply invest in the underlying benchmark. The returns generated are similar to the indices.  

Investors looking for high-risk high-return investments should avoid index funds.

Tax Implications of Investing in an Index Fund

Index funds are subject to capital gains tax when you sell your units.

Short-term capital gains (less than 12 months holding) are taxed at the rate of 20%.

Whereas long-term capital gains (more than 12 months of holding) are taxed at the rate of 12.5% for capital gains over Rs. 1.25 Lac.

Final Thoughts

Index funds offer you market returns without taking too much risk as in the case of an individual stock investment.

Index funds investment provides you exposure to a diversified portfolio of stocks while keeping your expense ratio low.

Beginners who don’t have experience in share market investing can start an index fund investment even with Rs. 100 every month.

You just need to stay invested for a long-term period for successful index fund investment.

FAQs

What are the advantages of investing in an index fund over an actively managed fund?

The main advantage of investing in an index fund over an actively managed fund is the low fees.

Actively managed funds require a fund manager to research and select stocks, resulting in higher fees.

Index funds, on the other hand, track a specific index and do not require active management which results in lower fees.

How often should I review my index fund portfolio?

It’s a good idea to review your index fund portfolio once a year to ensure that it aligns with your investment goals.

If your investment goals or risk tolerance change, you may need to make adjustments to your portfolio.

How can I monitor the performance of my index fund investment?

You can monitor the performance of your index fund investment by tracking the performance of the underlying index.

Most brokerage platforms provide comparison charts that enable you to track the performance of your investments in real-time.

Are index funds a good investment option for beginners?

Yes, index funds are a great investment option for beginners who are just starting with investing and don’t want to bother about stock research.

Index funds provide diversification, and low fees, and do not require extensive research or market timing.

How can I buy an India index fund?

You can use an investment platform like Groww, Scripbox & Kuvera, or a stock brokerage account like Zerodha Coin to buy an India index fund.

How do I directly invest in index funds?

You can use Zerodha Coin to invest directly in index funds. Another option is to visit the Mutual fund website directly, create a folio, and invest in an index fund.

What are the risks of investing in an index fund?

The main risk of investing in an index fund is market risk. Index funds track a specific index, their performance is closely tied to the performance of the overall market.

If the market experiences a downturn, the value of your index fund investment will decline.

About Pardeep Goyal

I talk about saving & investing money. You would love my articles related to Credit Cards, Travel, Shopping, Tax Saving. I share transparently how I am making passive income from multiple sources online.

Leave a Comment

Save Upto 90% on brokerageOpen FREE Demat Account Now