Best Index Funds to Invest

Index funds are known to replicate the performance of an index in terms of returns at a minimal cost. These funds are also known as passive funds as these do not require a high level of active management for the fund. Due to the involvement of lesser management, the expense ratio and other fees of these funds are lower than the actively managed funds, which makes them cost-efficient.

• Given the dependency of these funds on the performance of an index, index funds are passively managed; hence, these funds are not meant to outperform the market but instead mimic the index’s performance
• Index funds provide broad market exposure and low portfolio turnover to the investors
• Index funds tend to invest only in mature companies that generally have their best growth years behind them. Investors of such funds do not benefit from the high growth potential of emerging small and midcap companies

Also Read: Index Funds- Features, Advantages, Taxation

Top 5 Index Funds to Invest

Given the ideal investment horizon of 5 years, here is a list of 5 best index funds that you may invest in-

Data as on 27 May 2020; Source: Value Research

1. HDFC Index Nifty-50 Plan

(Data as on 27 May 2020; Source: Value Research)

• HDFC Index Nifty-50 is an open-ended scheme that replicates and/or tracks the Nifty 50 Index
• The suggested time horizon for investments in this scheme is at least 3 years
• The scheme is passively managed with investments in stocks in a proportion that is similar to the weightages of these stocks in the Nifty 50 Index
• The fund managers invest with an investment strategy that focuses on the reduction of tracking error through rebalancing the portfolio regularly

2. UTI Nifty Index Fund

(Data as on 27 May 2020; Source: Value Research)

• The fund aims to minimize the difference between the returns of the fund and the index
• The fund should be considered by the investors who are looking forward to market exposure at a relatively cheaper cost and willing to eliminate the systematic risk of a specific company or sector
• Investors of this fund must have an investment horizon of a minimum of 5 years

3. SBI Nifty Index Fund

(Data as on 27 May 2020; Source: Value Research)

• The scheme invests with the objective of achieving returns that are equivalent to the total returns of Nifty 50 Index by minimizing the performance difference between the benchmark index and the scheme
• Investors of the scheme must have an investment horizon of at least 5 years in order to allow the fund to beat the inflation and perform in the market
• The scheme claims to invest in stocks comprising of the Nifty 50 Index in the same proportion as their weightage in the index

4. ICICI Prudential Nifty Index Fund

(Data as on 27 May 2020; Source: Value Research)

• The fund is an open-ended index linked scheme that seeks to track the returns of the Nifty 50 Index through investments in stocks of similar index
• The scheme is considered suitable for investors who are looking for higher returns and goals for the medium term such as passive investing and creating wealth
• The fund’s objective is to closely track the performance of the NAV of the plan with the performance of the Nifty 50 Index over the same time period

5. LIC MF Index-Nifty Plan

(Data as on 27 May 2020; Source: Value Research)

• The scheme aims to generate returns commensurate with the performance of Nifty 50 by investing in the index stocks, subject to tracking errors
• The fund tends to deliver long term growth to its investors by investing in equity instrument of respective index stocks subject to tracking error
• The fund involves a moderately high level of risks and asks for an investment horizon of equal to or more than 5 years

Advantages of Investing in Index Funds

• Low Cost:  Since index funds are passively managed, the total expense ratio (TER) is very less as compared to the actively managed ones. While an actively managed fund may charge you anything between 1-2% as TER, an index fund would typically charge you between 0.20% to 0.50%. At face value, the cost difference may seem small but in the long run, the difference can be as large as 15% of your net returns.

• Diversification: An index fund typically constitutes of top companies in terms of market capitalization. It means leading market players across the sectors would be a part of the benchmark index. The auto diversification allows the investor to reduce risk from staying invested in a particular stock or a sector.

• No errors: Since the allocation of assets in case of index funds is not at the discretion of the fund manager, there is virtually no scope of the investor incurring losses due to inefficiency in asset allocation or poor management.

• Efficient Market Hypothesis: Major economic thinkers have lent their support to the efficient market hypothesis– the theory that no fund manager or investor can outperform the market in the long run. Price anomalies are eventually discovered by competitors and stocks are priced according to their fundamental value. Hence, an index fund that represents the market would outperform all active funds in the long run.

How to Invest in Index Funds

You can invest in index funds through either of the following ways-

• Offline mode of investing– If you are not confident of your knowledge, you may choose to invest through a broker. However, investing in a fund through a broker will make you eligible for investments through regular plans that offer different returns and varied expenses in investment. If you wish to invest in the fund independently, you must visit the nearest branch of the AMC of your fund. Don’t forget to carry the following documents-
  • Identity Proof (Aadhar Card)
  • Canceled cheque
  • Passport size photos (around 4-5)
  • PAN Card
  • KYC documents (for KYC verification)
• Online mode of investing– If you do not wish to add on to your expense of commissions or brokerage, you may visit online investment platforms such as Paisabazaar.com wherein you can choose from and compare more than 1,700 funds- all in one place, instead of following the long procedure of visiting the website of each AMC and then choosing from them. Here, you can select the fund in which you want to invest, look at the details and compare similar schemes as well as use SIP Calculator or Lumpsum Calculator to estimate the future value of your investment

Frequently Asked Questions

Ques. Should I invest in Index funds if I have a lower investment horizon?

Ans. No, you are not advised to invest in index funds if you have an investment horizon of less than 5 years.

Ques. Are Index funds safe?

Ans. Yes, Index funds are considered safe and are also considered suitable for investors with lesser risk tolerance. However, it must be noted that all mutual funds are subject to market risks and must be invested in and monitored carefully.

Ques. Which is the best Index fund to invest in?

Ans. Given below are top performing Index funds to invest in 2020-

• HDFC Index Nifty-50 Plan
• UTI Nifty Index Fund
• SBI Nifty Index Fund

Ques. Who should invest in Index funds?

Ans. If you are a risk-averse investor with a longer investment horizon, a minimum of 5 years and if you are looking for investment options better than fixed deposits.

Ques. For how long should you hold Index funds?

Ans. One must stick on to Index funds for a minimum of 5 years in order to allow the funds to beat inflation and perform.