Index funds in India

Index funds in India are passive open-ended mutual funds that replicate a recognised market index by holding its constituent securities in the same weights, regulated by SEBI under the SEBI (Mutual Funds) Regulations 1996 . They are the principal passive vehicle in the Indian fund industry alongside exchange-traded funds , aiming to match an index return minus a small expense ratio rather than beat it.

Passive assets in India, index funds plus ETFs, crossed about Rs 14 lakh crore by December 2025, roughly 17 per cent of total mutual fund industry assets, per AMFI monthly data. That share was in the low single digits a decade earlier. The growth tracks three forces: the 2013 arrival of direct plans , which stripped distributor commission out of the expense ratio; rising awareness that most large-cap active funds lag their benchmark net of fees; and a steady fall in index-fund TER to the 0.05 to 0.30 per cent band on direct plans.

This article is the orientation map for passive index investing in India. It covers the history from the UTI Master Index Fund of 1998 , the SEBI passive-fund framework, the full map of index families and the funds that track them, how to choose between funds that hold identical stocks, the index fund versus ETF and active-versus-passive comparisons, costs and taxation, and the construction risks a passive investor inherits. Each index family and concept links to its dedicated article.

The active side of the industry sits at the other pole. PPFAS Mutual Fund , whose value-investing philosophy is structurally active, offers no index funds; its CIO commentary in the factsheets and annual letters periodically engages the active-versus-passive debate, and the AMC has acknowledged that passive index funds suit many retail investors who lack the time or interest to select a fund manager.

History and growth of passive investing in India

Index investing began in the United States when John Bogle launched the Vanguard 500 Index Fund in 1976, built on Eugene Fama’s efficient-market work and William Sharpe’s capital-asset-pricing model. India came to it two decades later.

The UTI Master Index Fund , launched by the Unit Trust of India in 1998, was the first Indian index fund. It tracked the BSE Sensex as a conventional open-ended scheme bought and sold at end-of-day NAV, with no exchange listing. Indian market microstructure of the late 1990s made tracking hard: settlement cycles were longer and less standardised than today’s T+1, and rebalancing all constituents at once was operationally awkward.

The next milestone was an exchange-traded one. Benchmark Mutual Fund launched Nifty BeES , the first Indian ETF, on 28 December 2001; it listed on the National Stock Exchange on 8 January 2002 and tracked the Nifty 50 . Benchmark’s ETF franchise later passed to Nippon India, and Nifty BeES still runs a direct expense ratio near 0.04 per cent.

Adoption stayed thin through the 2000s. The turn came after 2013, when SEBI mandated direct plans and the commission-free expense ratio made passive products visibly cheaper. Between 2015 and 2020 the large AMCs built out full index-fund suites. From 2020, international index funds tracking the Nasdaq 100 and S&P 500 drew strong retail interest until SEBI’s overseas-investment cap forced several to pause subscriptions in early 2022.

The SEBI regulatory framework for passive funds

Index funds are mutual fund schemes, so they fall under the SEBI (Mutual Funds) Regulations 1996 like any other scheme. Two later instruments shape the passive segment specifically.

The scheme categorisation circular of 6 October 2017 (SEBI/HO/IMD/DF3/CIR/P/2017/114) placed index funds and ETFs under the “Other Schemes” head and required an index fund or ETF to invest at least 95 per cent of net assets in the securities of its underlying index. It also forced one scheme per category per AMC, which is why index funds and ETFs, treated as separate categories, both survived the rationalisation .

The circular on the development of passive funds, SEBI/HO/IMD/DOF2/P/CIR/2022/69 dated 23 May 2022, in force from 1 July 2022, is the dedicated passive-fund framework. It set a market-making framework for ETFs, capped investor-education charges at 1 basis point of daily net assets, required the underlying index name in the scheme’s nomenclature, enabled passive ELSS tracking the top 250 companies, and prescribed disclosure of tracking error and tracking difference on a daily basis. The same circular tightened debt-index-fund norms on single-issuer and group exposure limits within the replicated index.

For debt-oriented index funds and ETFs, the post-Finance-Act-2023 tax change matters more than any SEBI rule: units bought on or after 1 April 2023 are taxed at the investor’s slab rate regardless of holding period, removing the long-term indexation benefit that earlier favoured debt passives.

Index families and the funds that track them

The Indian passive universe spans broad-market, size-segment, factor, sectoral, international, debt, and commodity indices. The table maps each index family to what it tracks and a representative fund, with the family’s dedicated article linked.

Broad-market funds dominate the index-fund AUM, led by Nifty 50 and Nifty Next 50. Size-segment and sectoral funds inherit higher tracking error because their constituents are less liquid. International index funds in India are structured as funds of funds investing in an underlying overseas ETF, which is what brings them inside SEBI’s overseas-investment cap and exposes them to the slab-rate debt-fund tax treatment.

Replication methodology

An index fund holds its index one of three ways. Full replication holds every constituent at index weight, used for liquid large-cap indices like the Nifty 50. Sampling holds a representative subset, used where the index has many or illiquid names, such as the Nifty 500. Optimisation uses a mathematical routine to minimise tracking error within turnover and liquidity constraints. The replication method partly drives the tracking difference the investor actually receives.

How to choose an index fund

Two Nifty 50 index funds hold the same 50 stocks in the same weights, so brand and past return tell you little. The deciding metrics are different.

The honest cost metric is tracking difference, the gap between the fund’s realised return and the index return over a period. It captures the TER plus the cash drag, the securities-lending income, the rebalancing trading cost, and the dividend-reinvestment timing, all in one number. A fund can carry a low headline TER and still show a wide tracking difference if it runs cash or trades poorly. The tracking-difference article sets out how to read it from the factsheet.

Tracking error, the standard deviation of the daily return gap, measures how consistently the fund hugs the index rather than how much it lagged. A fund can have low tracking difference but high tracking error, or the reverse.

TER still matters as the structural floor on tracking difference. Direct-plan Nifty 50 index funds run 0.10 to 0.20 per cent; broader and sectoral funds run higher.

Fund size and the index variant complete the check. A larger fund spreads fixed costs and rebalances more cheaply. Confirm whether the fund benchmarks against the price return or the total return variant: the total-return index reinvests dividends and is the fairer yardstick, so a fund quoting tracking against the TRI is being honest about the harder comparison. The how-to-select guide and the first-investment walkthrough take this step by step.

TER trajectory

Index-fund expense ratios in India have compressed steadily. A Nifty 50 index fund that charged 0.50 to 1.00 per cent around 2010 now charges 0.10 to 0.20 per cent on the direct plan, while a large-cap active flexi-cap fund charges 0.50 to 1.50 per cent direct and 1.50 to 2.50 per cent regular. Over a 25 to 30 year holding period that gap compounds into a material difference in terminal wealth, which is the core of the passive case.

Index fund versus ETF versus active fund

Index funds and ETFs both deliver passive index exposure; they differ in the wrapper. The index fund versus ETF comparison covers the full detail, and the mutual fund versus ETF article the broader structural contrast.

Against active funds the trade-off is philosophical. Index funds suit investors who accept the market return, want the lowest cost, and decline to bet on a manager. Active funds suit those who believe distinctive managers generate alpha worth the fee. Many investors run both, an index core with an active satellite. PPFAS’s commentary acknowledges index funds suit many retail investors while arguing its own overseas-allocation approach earns its active fee.

Costs and taxation

Beyond the TER, index-fund investors pay no brokerage or stamp duty on NAV-based purchases, unlike ETF trades. Exit loads on index funds are usually nil or a small charge for very short holdings.

Equity-oriented index funds, those with at least 65 per cent in Indian equity, are taxed as equity mutual funds . Under Section 112A , long-term capital gains on units held over 12 months are taxed at 12.5 per cent above the Rs 1.25 lakh annual exemption. Under Section 111A , short-term gains on units held 12 months or less are taxed at 20 per cent. These are the FY2025-26 rates after the Finance Act 2024 changes; the capital-gains overview sets out the full schedule.

International index funds structured as funds of funds and debt-oriented index funds do not get equity treatment. Units bought on or after 1 April 2023 are taxed at the investor’s slab rate regardless of holding period, the same post-Finance-Act-2023 treatment as a debt mutual fund . For a high-bracket investor this slab-rate hit is a real consideration when choosing an international index FoF over a domestic equity index fund.

What the data shows on active versus passive

The active-versus-passive debate is the most prominent one in Indian fund investing, and the active-versus-passive article carries the full record. The headline evidence is the SPIVA India scorecard from S&P Dow Jones Indices. The Mid-Year 2025 scorecard found 66 per cent of Indian large-cap funds underperformed their S&P benchmark in the first half of 2025, and 73 per cent underperformed over the 10-year horizon. Mid-cap and small-cap funds underperformed at about 82 per cent over 10 years on the same scorecard, which cuts against the common claim that active management always wins in less efficient segments over the long run.

That record is the empirical case for a Nifty 50 or Nifty 500 index core. It is not a case for buying any index blindly, because a passive investor inherits whatever the index does.

Construction risks the passive investor inherits

Index funds copy the index, including its flaws. Market-cap weighting concentrates the fund in whatever sector has run up most, so a Nifty 50 fund carries a heavy financials and IT tilt by construction. Reconstitution rules force the fund to buy names as they enter the index and sell as they leave, a known small drag. Sectoral and thematic index funds carry single-sector concentration that may not match an investor’s risk appetite, and they show higher tracking error where constituents are less liquid. The large-cap versus index-fund article weighs these against an actively chosen large-cap fund.

See also

• Mutual funds in India
• Mutual fund industry in India
• Exchange-traded funds in India
• Active vs passive equity in India
• Index fund vs ETF in India
• Mutual fund vs ETF
• UTI Master Index Fund (1998)
• Nifty BeES, the first ETF (2001)
• Nifty BeES
• Nifty 50 Index Fund
• Nifty 50 ETF
• Nifty Next 50 Index Fund
• Nifty 100 Index Fund
• Nifty 500 Index Fund
• Nifty Midcap 150 Index Fund
• Nifty Smallcap 250 Index Fund
• Nifty LargeMidcap 250 Index Fund
• Sensex Index Fund
• Nifty Bank Index Fund
• Nifty IT Index Fund
• FMCG and consumption fund
• Large cap vs index fund
• Large cap mutual fund
• Mid cap mutual fund
• Motilal Oswal S&P 500 Index Fund
• Motilal Oswal Nasdaq 100
• Equity ETF India
• Debt ETF India
• Gold ETF India
• Silver ETF India
• International ETF India
• Bharat Bond ETF
• CPSE ETF
• Bharat 22 ETF
• Tracking error in index funds
• Tracking difference in index funds
• How to select an index fund
• How to set up your first index-fund investment
• Nifty 50 (the index)
• Sensex (the index)
• Net asset value
• Mutual fund TER in India
• Regular vs direct plan
• Direct plan adoption in India
• SIP
• Flexi cap mutual fund India
• Equity mutual fund taxation
• LTCG on equity (Section 112A)
• STCG on equity (Section 111A)
• Capital gains tax in India
• Debt mutual fund taxation 2023
• SEBI (Mutual Funds) Regulations 1996
• SEBI scheme rationalisation 2017
• SEBI scheme categorisation, October 2017
• AMFI
• National Stock Exchange
• Bombay Stock Exchange
• PPFAS Mutual Fund
• PPFAS value investing
• Zerodha Fund House

External references

• AMFI mutual fund AUM data
• SEBI master circular for mutual funds
• SEBI circular on development of passive funds (23 May 2022)
• NSE Indices
• Asia Index (BSE indices)
• S&P Dow Jones SPIVA India scorecard

References

1. SEBI (Mutual Funds) Regulations 1996.
2. SEBI circular on development of passive funds, SEBI/HO/IMD/DOF2/P/CIR/2022/69, 23 May 2022.
3. SEBI scheme categorisation circular, SEBI/HO/IMD/DF3/CIR/P/2017/114, 6 October 2017.
4. AMFI monthly mutual fund AUM and passive-fund data, December 2025.
5. S&P Dow Jones Indices, SPIVA India Mid-Year 2025 scorecard.
6. NSE Indices Limited, index methodology documents.