Index Funds in India: A Passive Investment Revolution
The Indian mutual fund industry has witnessed a significant shift towards passive investing, with index funds emerging as a popular choice for investors seeking low-cost, transparent investment options that mirror market performance.
Index funds are mutual fund schemes that replicate a specific market index, such as the Nifty 50, Sensex etc by investing in the same securities in similar proportions. These funds provide investors with broad market exposure while maintaining lower costs compared to actively managed funds. They buy the securities that make up the index, which gives investors a more diversified portfolio than buying individual stocks.
Key features of index funds include:
- Passive Management: Fund managers simply track the underlying index rather than actively selecting stocks
- Lower Expense Ratios: Without active management, costs are significantly reduced
- Transparency: Investors always know which stocks they own since the portfolio mirrors the index
- Market Returns: Performance closely tracks the chosen index, providing market-linked returns
How Index funds work :
Indexing is a passive way to manage your investments. Instead of picking stocks to invest in and planning when to buy and sell them, a fund portfolio manager builds a portfolio whose holdings match those of an index. The idea is that if the fund mimics the profile of the index—either the whole stock market or a large part of it—its performance will be the same as that of the index.
Performance and Market Impact
Index funds have demonstrated strong performance in 2024, particularly in the large-cap segment. The reduced volatility compared to actively managed funds, with an average beta of 0.85, has made them attractive to risk-aware investors.
Investment Considerations
For investors considering index funds, experts recommend:
Long-term Perspective: Index funds work best as long-term investments. Index funds are generally seen as good core holdings for retirement plans.
Regular Investment: Systematic Investment Plans (SIPs) can help average out market volatility.
Index Selection: Choose funds tracking well-established, liquid indices.
Cost Analysis: Compare expense ratios across similar index funds.
Tax Implications
Recent tax changes have impacted index fund investments:
- Long-term capital gains exceeding ₹1.25 lakh are taxed at 12.5% (effective July 23, 2024).
- Short-term gains are taxed at 20% (previously 15%). The tax rates for long and short term have remained unchanged post budget 2025.
- The increased exemption limit provides some relief to small investors
(Source: Business Standard – Investing in mutual funds? This is your tax reckoner for 2025-2026)
Recent Developments
The index fund landscape in India has seen remarkable growth in 2024, driven by several factors:
Regulatory Support: SEBI has introduced measures to enhance transparency and reduce tracking error in index funds, ensuring better alignment with their benchmark indices.
Product Innovation: Asset management companies have launched various index fund options, including:
- Broad market index funds
- Sectoral index funds
- Smart beta funds
- International index funds
According to Association of Mutual Funds in India (AMFI) the MF Industry’s AUM has grown from ₹ 27.86 trillion as on January 31, 2020 to ₹67.25 trillion as on January 31, 2025, more than 2 fold increase in a span of 5 years. AMFI also says that new folios in the passive fund segment, which includes index funds and exchange-traded funds (ETFs), have grown by an impressive 37% during 2024. Additionally, the assets under management (AUM) have increased by 24%, reaching over Rs 11 trillion in 2024. (Source: https://timesofindia.indiatimes.com/blogs/voices/investors-get-massive-in-passive-as-amcs-launch-new-offerings/)
Retail investors have shown growing interest in passive investing, recognizing the benefits of lower costs and consistent returns. This trend has been particularly strong among first-time investors and millennials seeking simplified investment options.
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Future Outlook
The future of index funds in India looks promising, supported by several factors:
Growing Financial Literacy: Increased awareness about the benefits of low-cost investing
Digital Adoption: Enhanced accessibility through digital platforms
Market Maturity: Growing efficiency in Indian markets making it harder for active funds to consistently outperform
Global Trends: Following the global shift towards passive investing
Index funds represent a significant evolution in India’s investment landscape, offering a simple, cost-effective way to participate in market growth. Their growing popularity reflects a maturing market where investors increasingly recognize the value of low-cost, transparent investment options.
As India’s financial markets continue to develop and investor sophistication grows, index funds are likely to play an increasingly important role in portfolio construction. Their combination of broad market exposure, low costs, and transparency makes them an attractive option for both novice and experienced investors seeking long-term wealth creation through market-linked returns.
For investors looking to build a diversified portfolio with minimal complexity and lower costs, index funds offer a compelling investment avenue. As the industry continues to evolve, we can expect to see further innovations and options in this space, providing investors with even more opportunities to access market returns efficiently.
Disclaimer
The information contained in this document/Video is compiled from third party and publicly available sources and is included for general information purposes only. There can be no assurance and guarantee on the yields. Views expressed by the Fund Manager cannot be construed to be a decision to invest. The statements contained herein are based on current views and involve known and unknown risks and uncertainties. Whilst Mirae Asset Investment Managers (India) Private Limited (the AMC) shall have no responsibility/liability whatso- ever for the accuracy or any use or reliance thereof of such information. The AMC, its associate or sponsors or group companies, its Directors or employees accepts no liability for any loss or damage of any kind resulting out of the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. Any reliance on the accuracy or use of such information shall be done only after consultation to the financial consultant to understand the specific legal, tax or financial implications.
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