Index funds are gaining traction in India’s evolving investment ecosystem. As investors look for low-cost, diversified, and reliable options, index funds emerge as a popular choice. But how safe are they in a developing and often volatile economy like India?
Why Are Index Funds Considered a Safe Option?
Index funds are mutual funds or exchange-traded funds (ETFs) that replicate a specific market index such as Nifty 50, Sensex, Nifty Midcap 150, or Nifty Next 50. These funds do not aim to beat the market but to mirror its performance at a low cost.
They provide wide market exposure and diversity across sectors and asset classes based on the underlying index. Some of its benefits are:
1. Low Cost, High Efficiency
One of the most significant benefits of index mutual funds is their cost efficiency. The expense ratio of index funds is typically between 0.10% and 0.30%, whereas actively managed funds often charge between 1% to 2%. This cost difference compounds over time, directly benefiting investors.
- Example: The SBI Nifty 50 Index Fund has an expense ratio of just 0.35% (direct plan), while the average actively managed large-cap fund charges close to 1.5%.
2. Performance Trends in FY 24–25
Index funds have consistently delivered strong returns, especially in a bullish market. In the first half of 2024, the top 10 passive mutual funds (index and ETFs) provided returns of up to 36%. Some of the individual funds with high returns were:
- Mirae Asset Nifty India Manufacturing ETF: Returned 32.46% in the first half of 2024
- Kotak Nifty Alpha 50 ETF: Delivered 32.10% during the same period.
Index funds tracking broader and mid-sized indices like the Nifty Next 50 and Nifty Midcap 150 have also shown competitive performance over the past 3 years compared to many actively managed funds.
3. Economic Volatility and Resilience
Despite economic swings, indices tend to recover over the long term. Index funds, by design, ride these cycles without trying to time the market—often a challenging feat even for seasoned investors.
4. Growing Popularity in India
Passive investing is no longer a niche strategy. More investors are choosing to invest in index funds for the long run for consistent returns. For instance, 63 passive New Fund Offers were launched in 2024, up from 51 in 2023. Investors now have access to passive funds across large-cap, mid-cap, sectoral, and thematic categories.
5. Diversification and Transparency
Index funds inherently spread risk. A Nifty 50 index fund, for example, gives exposure to India’s 50 largest companies across sectors. This diversification reduces company-specific risk and cushions market shocks.
Additionally, index funds disclose their portfolio daily, unlike some active funds that report monthly. This transparency is a big plus for investors seeking clarity and control.
Risks to Consider
Index funds are not immune to risks:
- No Downside Protection: Since they follow the market, they will fall if the index falls.
No Outperformance: Investors won’t get alpha returns since the aim is to track the index, not beat it.
Tracking Error: Sometimes, the returns of an index fund may slightly deviate from the index it follows due to costs and fund management practices.
Conclusion
For long-term investors who believe in India’s growth story, index funds are a pragmatic option. They combine affordability, diversification, and simplicity. While they may not shield from short-term market declines, they offer consistent participation in India’s economic progress.
The key is to choose the right index fund based on your needs using tools like an SIP calculator, keep expectations realistic, and stay invested through cycles. In a developing economy like India, where volatility and potential go hand in hand, index funds provide a steady route to long-term wealth creation.
