Index funds in India

Index funds in India are passive-investment mutual fund schemes that aim to replicate the performance of a specific market index, typically by holding constituent securities in proportions matching the index weights. Index funds represent the principal passive-investing vehicle in the Indian mutual fund industry, alongside exchange-traded funds (ETFs) . The Indian index-fund industry, though smaller than active-mutual-fund and direct-equity segments, has grown substantially since the 2010s, reflecting global trends toward passive investing and Indian retail-investor cost-consciousness.

Index funds are categorised by SEBI as passively-managed equity-oriented or debt-oriented schemes that track a benchmark index. Major Indian index funds track domestic indices like the Nifty 50, Nifty 500, Sensex (BSE 30), and various sector indices. International index funds track global indices like the S&P 500, Nasdaq 100, and others (subject to SEBI’s overseas-allocation framework). The principal value proposition of index funds is low expense ratios (typically 0.05 to 0.5 per cent direct-plan TER), making them substantially cheaper than actively-managed schemes (which typically charge 0.5 to 2.0 per cent direct-plan TER).

The Indian mutual fund industry’s actively-managed segment, in which PPFAS Mutual Fund operates, contrasts with the passive index-fund segment philosophically. PPFAS’s CIO commentary in factsheets and Annual Letters periodically discusses the active-versus-passive debate. PPFAS’s value-investing-and-behavioural-finance philosophy is structurally active, but the AMC has acknowledged that passive index funds are appropriate for many retail investors who lack the time or interest for fund-manager selection.

Origin and history

Early passive investing in India

Index funds emerged globally in the 1970s (Jack Bogle’s Vanguard 500 in 1976 was a defining moment). Indian index funds emerged later:

• 1990s: Some early index-based products in the post-liberalisation Indian mutual fund landscape.
• 2001: Benchmark Mutual Fund launched the first Indian ETF (Nifty BeES, tracking the Nifty 50).
• Early 2000s: A handful of Indian AMCs offered Nifty 50 and Sensex index funds, but with limited investor uptake.
• 2010s: Index funds expanded as direct-plan adoption and TER awareness rose.

2010s and 2020s expansion

The 2010s saw substantial Indian index-fund expansion:

• 2013 onward: Direct-plan introduction by SEBI made low-cost passive products more attractive.
• 2015-2020: Major AMCs launched comprehensive index-fund product suites.
• 2020-2025: Substantial growth in passive AUM; international index funds (Nasdaq 100, S&P 500) became popular.
• 2026: Indian index-fund AUM in the lakhs of crores; substantial growth trajectory.

Drivers of growth

• TER awareness: Investors recognising the long-term impact of expense ratios.
• Direct-plan ecosystem: Aggregator platforms making passive products accessible.
• International index-fund availability: Allowing Indian investors to access US-and-global indices.
• Disillusionment with active fund underperformance: Particularly in large-cap categories where active managers struggle to beat benchmarks consistently.

SEBI categorisation

Equity-oriented index funds

Per SEBI’s scheme rationalisation framework (2017), equity-oriented index funds:

• Track an equity index (Nifty 50, Sensex, Nifty 500, etc.).
• Maintain over 95 per cent investment in the underlying index constituents.
• Are categorised under “Other Schemes” -> “Index Funds” subcategory.

Debt-oriented index funds

Debt-oriented index funds track debt indices (e.g., CRISIL composite indices). They:

• Maintain over 95 per cent investment in the index constituents.
• Are subject to the post-Finance-Act-2023 slab-rate taxation for investments made on or after 1 April 2023.

Hybrid index funds

Some specialised index funds track hybrid indices, though this is a smaller category.

Sector and thematic index funds

• Sector index funds: Track sector indices (Bank Nifty, IT Nifty, Pharma Nifty).
• Thematic index funds: Track thematic indices (ESG, infrastructure).

Fund-of-funds (FoF) for international indices

International index funds in India are typically structured as Fund-of-Funds (FoF) investing in underlying international ETFs or international index funds. This structure addresses the SEBI overseas-investment-limit framework.

Operational framework

Replication methodology

Index funds typically use one of:

• Full replication: Holding all index constituents in their index weights. Used for liquid, large-cap indices (Nifty 50).
• Sampling replication: Holding a representative subset rather than all constituents. Used for indices with many constituents (Nifty 500 with 500 stocks).
• Optimisation: Mathematical optimisation to minimise tracking error within constraints.

Tracking error

Tracking error is the deviation between an index fund’s return and the underlying index’s return. Sources of tracking error:

• Expense ratio: Fund expenses reduce returns relative to the index.
• Cash holding: Index funds typically hold some cash for redemptions, creating slight performance drag.
• Trading costs: Transaction costs on buying and selling index constituents.
• Sampling error: For sampling-based funds.
• Index reconstitution timing: Slight differences in execution timing.

Tracking error in Indian index funds is typically 0.1 to 0.3 per cent annually for well-managed large-cap index funds.

Expense ratio

Index fund expense ratios in India have decreased substantially:

• 2010 era: 0.5 to 1.0 per cent TER common.
• 2020 era: 0.1 to 0.5 per cent TER common.
• 2026 era: 0.05 to 0.3 per cent TER common for major index funds.

This compares with actively-managed flexi-cap funds at 0.5 to 1.5 per cent direct-plan TER and regular-plan flexi-cap at 1.5 to 2.5 per cent TER.

Major Indian index funds

Nifty 50 index funds

The Nifty 50 is the most-tracked Indian index, comprising the 50 largest companies on NSE. Major Nifty 50 index funds:

• UTI Nifty 50 Index Fund.
• HDFC Nifty 50 Index Fund.
• ICICI Prudential Nifty 50 Index Fund.
• SBI Nifty 50 Index Fund.
• Aditya Birla Sun Life Nifty 50 Index Fund.
• Nippon India Nifty 50 Index Fund.

These are generally low-TER (0.05 to 0.20 per cent direct plan) and widely held.

Nifty Next 50 index funds

The Nifty Next 50 comprises the next 50 large-caps after Nifty 50. Notable funds:

• UTI Nifty Next 50 Index Fund.
• ICICI Prudential Nifty Next 50 Index Fund.

Nifty 500 index funds

The Nifty 500 comprises the 500 largest companies on NSE. Notable funds:

• Motilal Oswal Nifty 500 Index Fund.
• HDFC Nifty 500 Index Fund.

The Nifty 500 is also PPFCF’s benchmark; an investor seeking pure-benchmark exposure can choose a Nifty 500 index fund.

Sensex index funds

The Sensex (BSE 30) comprises 30 large companies on BSE. Notable funds:

• HDFC Sensex Index Fund.
• Tata Sensex Index Fund.

Sector and thematic index funds

• Bank Nifty index funds: Tracking the Nifty Bank index.
• Pharma index funds: Tracking the Nifty Pharma index.
• IT index funds: Tracking the Nifty IT index.

International index funds (Fund-of-Funds)

• Motilal Oswal Nasdaq 100 ETF FoF: International technology exposure.
• Mirae Asset NYSE FANG+ ETF FoF: FANG+ stocks.
• ICICI Prudential US Bluechip Equity Fund.
• Various S&P 500 index FoFs.

These are subject to SEBI overseas-investment-limit constraints; some have been closed to new subscriptions following the 2022 overseas-cap pause.

Comparison with active funds

Performance comparison

The active-versus-passive debate, prominent in global investing, plays out in Indian markets:

• Large-cap active funds: Many struggle to consistently outperform the Nifty 50 or Nifty 500 net of fees. Recent industry data suggests approximately 50-70 per cent of large-cap active funds underperform the benchmark over 5-year horizons.
• Mid-cap and small-cap active funds: Some actively-managed mid-cap and small-cap funds have outperformed their benchmarks due to less efficient market segments.
• Specialist active funds: PPFCF’s distinctive overseas-allocation approach generates differentiation that pure-Indian benchmark comparison may understate.

Cost comparison

• Index funds: 0.05 to 0.3 per cent direct-plan TER.
• Direct-plan actively-managed equity funds: 0.5 to 1.5 per cent direct-plan TER.
• Regular-plan actively-managed equity funds: 1.5 to 2.5 per cent TER.

Over a 30-year investment horizon, the difference compounds to substantial wealth difference.

Philosophical positioning

• Index funds: Suitable for investors who lack time for fund-manager selection, accept market returns, and prioritise low cost.
• Active funds: Suitable for investors who believe in alpha generation, accept higher fees in return for differentiation, and select managers with conviction.

PPFCF’s commentary periodically acknowledges that index funds are appropriate for many retail investors while making the case for active-management-with-distinctive-philosophy approaches.

Comparison with ETFs

Index fund versus ETF

ETFs and index funds serve similar passive-investing goals; choice depends on investor preference and operational fit.

Tax framework

Equity-oriented index funds

Equity-oriented index funds (over 65 per cent equity exposure to Indian equity) are taxed under:

• Section 112A: 12.5 per cent LTCG above Rs 1.25 lakh annual exemption.
• Section 111A: 20 per cent STCG for holdings under 12 months.

(Post Finance Act 2024 framework.)

International index funds (Fund-of-Funds)

International index funds structured as FoFs are typically taxed as debt funds:

• Investments made on or after 1 April 2023: Slab-rate STCG regardless of holding period (post Finance Act 2023).
• Older investments: Indexation-based LTCG (where applicable under pre-2023 framework).

This tax treatment is less favourable for high-bracket investors and is a consideration in international-index-fund selection.

Debt-oriented index funds

Similar to international FoFs: post-1-April-2023 investments at slab rate.

Industry data

AUM trajectory

Indian index-fund AUM:

• 2010: Rs few hundred crores.
• 2015: Rs few thousand crores.
• 2020: Rs few lakh crores.
• 2026: Several lakh crores.

The trajectory reflects:

• Rising retail-investor awareness.
• Direct-plan ecosystem.
• TER awareness.
• International index-fund availability (until SEBI overseas-cap suspension affected some).

Industry share

Index funds represent approximately 5-10 per cent of total Indian mutual fund AUM as of 2026, growing from approximately 1-2 per cent in 2015. The share is expected to grow further but remains substantially smaller than actively-managed segments.

Major AMC offerings

Substantially every Indian AMC offers a range of index funds:

• UTI Mutual Fund: Substantial index-fund suite.
• HDFC Mutual Fund: Comprehensive index funds.
• ICICI Prudential Mutual Fund: Wide index-fund offerings.
• SBI Mutual Fund: Multiple index funds.
• Aditya Birla Sun Life Mutual Fund: Range of index funds.
• Nippon India Mutual Fund: Index-fund suite.
• Mirae Asset Mutual Fund: International and domestic index funds.
• Motilal Oswal AMC: Distinctive Nasdaq 100 and other US index funds.

PPFAS Mutual Fund , by contrast, focuses exclusively on actively-managed schemes and does not offer index funds.

Criticism and debates

Active versus passive debate

The most prominent debate in Indian mutual fund investing:

• Active proponents: Argue that distinctive managers (like those at PPFAS, Marcellus, Quantum, etc.) can generate alpha worth the higher fees.
• Passive proponents: Argue that consistent alpha is rare and that low-cost index funds are appropriate for most retail investors.
• Hybrid view: Many investors use both index funds (for core portfolio) and active funds (for satellite alpha-generation positions).

Index-construction concerns

Index funds inherit any flaws in their underlying indices:

• Market-cap weighting can concentrate in overvalued sectors.
• Reconstitution rules can introduce performance drag.
• Sectoral concentration in certain indices may not align with investor risk preferences.

International index-fund availability constraints

SEBI’s 2022 overseas-investment-cap suspension affected international index funds. Some were closed to new subscriptions, limiting investor access to specific global indices.

Tracking error in less liquid indices

Indices with less liquid constituents (mid-cap, small-cap, thematic) may have higher tracking errors, reducing the cost advantage of passive investing.

See also

• Exchange-traded fund India
• Nifty 500 TRI
• Nifty Bank TRI
• Bank Nifty
• PPFAS Mutual Fund
• Parag Parikh Flexi Cap Fund
• Mutual fund industry India
• Regular vs direct plan mutual fund
• Direct plan adoption in India
• Mutual fund TER India
• PPFAS value investing
• LTCG on equity mutual fund (Section 112A)
• STCG on equity mutual fund (Section 111A)
• Capital gains tax in India
• SEBI mutual fund category rationalisation 2017
• Flexi cap mutual fund India

External references

• AMFI Industry Data
• SEBI Master Circular for Mutual Funds, 2024
• NSE Indices
• BSE Indices
• Motilal Oswal AMC (Nasdaq 100 FoF, etc.)
• Vanguard global passive-investing reference

References

1. SEBI (Mutual Funds) Regulations, 1996.
2. SEBI Master Circular for Mutual Funds, 22 May 2024.
3. SEBI Scheme Rationalisation Circular, 2017.
4. SEBI Circular on TRI as benchmark for mutual fund schemes.
5. AMFI Industry Data on Indian mutual fund AUM (multi-year).
6. NSE Indices methodology documentation.
7. Finance Act, 2024 (Section 112A/111A framework).
8. Finance Act, 2023 (debt-MF taxation amendment).
9. PPFAS Mutual Fund Annual Letters and factsheets.
10. CFA Institute Investment Foundations on passive investing.
11. AMFI Industry Best Practices Guidelines.
12. Indian press archive on index-fund industry coverage.
13. Jack Bogle, “Common Sense on Mutual Funds” (1999) - global passive-investing reference.
14. Burton Malkiel, “A Random Walk Down Wall Street” - classic passive-investing reference.
15. Industry data on active-versus-passive performance comparisons.