Best Index Funds in India
Understanding index funds for stable, low-risk investment in India's growing economy, emphasizing top-performing options.
October 21, 2023
8 mins read

Understanding the Basics of Index Funds

An index fund is a type of mutual fund or ETF designed to mirror the components of a financial market index, such as the S&P 500 or Nifty 50 indices. This investment vehicle is a low-risk and diversified option, and investors can gain exposure to the broader market without purchasing individual stocks. Index funds remain relatively stable unless benchmark indexes change. Managers periodically rebalance securities in weighted indexes to match the benchmark. For instance, an index fund tracking the Nifty 50 will allocate approximately 9% of assets to HDFC Bank if it holds that weightage in the Nifty 50 index based on market capitalization.

Funds offer four key benefits to long-term investors:

  • Passive Investment Strategy
  • Lower Costs
  • Elimination of Human Bias
  • Diversification

Index funds have consistently generated incredible long-term returns, leveraging the robust performance and resilience of the Indian economy. Nifty 50 has delivered an 11-fold return in 23 years, while the Sensex has experienced a 35-fold increase in 39 years. Impressive historical returns underscore the potential for significant long-term gains through index funds.

As Warren Buffet says,

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Key Metrics for Index Funds Analysis

To compare different index funds, it is crucial to consider various factors:

  • Expense Ratios: A ratio of operating expenses to assets under management (AUM) are ideal if lower, for it safeguards an investor’s returns.
  • Fees: Index funds may have different fee structures, including front-end loads, back-end loads, and 12b-1 fees. These fees should be carefully evaluated as they can significantly impact an investor’s return over time.
  • Tracking Errors: Comparing tracking errors helps assess how closely an index fund follows its benchmark index. Larger deviations indicate potential issues such as poor fund construction, high fees, or operating expenses.
  • Other Considerations: Liquidity, Regulatory Compliance, Currency Risk & Diversification

Navigating Index Funds for NRIs

India’s thriving economy and diverse investment opportunities make it an attractive destination for foreign investors. Navigating its investment landscape requires understanding regulations and norms. Here are the key considerations for NRIs investing in Indian index funds.

  • Know Your Customer (KYC) Norms: Indian regulations require investors to complete the KYC process, providing identity and address proof to comply with anti-money laundering and terrorism financing laws.
  • Taxation: Investors should understand the tax implications, including long-term and short-term capital gains tax, as well as dividend distribution tax, associated with their investments in Indian index funds.
  • Foreign Currency Restrictions: Compliance with SEBI regulations prohibits asset management firms from accepting foreign currencies. NRIs must convert and transfer their foreign funds into Indian rupees through an NRO or NRE account.
  • Reporting Obligations under FATCA: NRIs should be aware of FATCA’s reporting obligations on Indian mutual funds. FATCA requires certain fund houses to disclose foreign assets held by U.S. residents for tax purposes.

Top Index Funds to Invest in India

Below is a breakdown of the top-performing index funds to take part in India’s growth story:

HDFC Index Fund - S&P BSE Sensex Plan

Benchmark: BSE Sensex

  1. AUM (cr): ₹4636
  2. Expense Ratio: 0.4%
  3. Fees: Entry Load: NA, Exit Load: NA, Management Fees: NA
  4. Returns: YTD Return: 2.04%, 1-Year Return: 16.34%, 3-Year Return: 27.45%, 5-Year Return: 13.07%
  5. Tracking Error: 1-Year Difference: -0.49%, 3-Year Difference: -0.59%, 5-Year Difference: -0.62%e

UTI Nifty Index Fund

Benchmark: Nifty 50

  1. AUM (cr): ₹10615
  2. Expense Ratio: 0.3%
  3. Fees: Entry Load: NA, Exit Load: NA, Management Fees: NA
  4. Returns: YTD Return: 1.45%, 1-Year Return: 15.47%, 3-Year Return: 27.68%, 5-Year Return: 12.61%
  5. Tracking Error: 1-Year Difference: -0.36%, 3-Year Difference: -0.39%, 5-Year Difference: -0.39%

Nippon India Index S&P BSE Sensex

Benchmark: BSE Sensex

  1. AUM (cr): ₹754
  2. Expense Ratio: 0.75%
  3. Fees: Back Load Fee: 0.25%, Redemption Fee: 0.25%
  4. Returns: YTD Return: 2.05%, 1-Year Return: 16.36%, 3-Year Return: 27.37%, 5-Year Return: 13.10%
  5. Tracking Error: 1-Year Difference: -0.90%, 3-Year Difference: -0.89%, 5-Year Difference: -0.96%

SBI Nifty Index Fund

Benchmark: Nifty 50

  1. AUM (cr): ₹3829
  2. Expense Ratio: 0.5%
  3. Fees: Entry Load: NA, Exit Load: NA, Back Load Fee: 1.00%, Redemption Fee: 1.00%
  4. Returns: YTD Return: 2.43%, 1-Year Return: 15.45%, 3-Year Return: 27.59%, 5-Year Return: 12.42%
  5. Tracking Error: 1-Year Difference: -0.60%, 3-Year Difference: -0.81%, 5-Year Difference: -0.94%

ICICI Prudential S&P BSE Sensex Index Fund

Benchmark: BSE Sensex

  1. AUM (cr): ₹954
  2. Expense Ratio: 0.27%
  3. Fees: Entry Load: NA, Exit Load: NA
  4. Returns: YTD Return: 1.91%, 1-Year Return: 16.14%, 3-Year Return: 27.06%, 5-Year Return: 12.86%
  5. Tracking Error: 1-Year Difference: 0.47%, 3-Year Difference: 0.71%, 5-Year Difference: 0.60%

Comparing the Top Indian Index Funds

When comparing top Indian index funds, here are some key factors to consider:

  1. For the BSE Sensex benchmark:
  2. HDFC Index Fund - S&P BSE Sensex Plan has consistently higher returns (27.45% and 13.07% over 3 and 5 years) and a higher AUM of ₹4636 crores.
  3. Nippon India Index S&P BSE Sensex has similar returns (27.37% and 13.10%) but a lower AUM of ₹754 crore. It also has a higher expense ratio of 0.75%
  4. ICICI Prudential S&P BSE Sensex Index Fund has slightly lower returns (27.06% and 12.86%), a low AUM of ₹954 crores, and an expense ratio of 0.27%.
  5. For the Nifty 50 benchmark:
  6. UTI Nifty Index Fund offers competitive returns (27.68% and 12.61%), a lower expense ratio of 0.3%, and a substantial AUM of ₹10,615 crore.
  7. SBI Nifty Index Fund has slightly lower returns (27.59% and 12.42%), a higher expense ratio of 0.5%, and an AUM of ₹3,829 crore.

HDFC Index Fund is a strong choice for the BSE Sensex benchmark, with a low tracking error and consistent returns. UTI Nifty Index Fund stands out for the Nifty 50 benchmark, offering strong returns, a lower expense ratio, and a substantial AUM.

Compounding Gains with Indian Index Funds

Long term oulook

Investors should evaluate long-term returns, expense ratios, and fees to compare index funds. They are an attractive choice for those seeking to benefit from India’s emergence as an economic powerhouse.

Inri, backed by Y Combinator, is an investment platform dedicated to NRIs & OCIs to invest in Indian markets. Inri is like Wealthfront for India, making investing in India fast and hassle-free.

This article does not provide any investment advice. Please consult your financial advisor before investing.

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