Top index mutual funds you can look at to ride the eventual market recovery

The Indian stock market has corrected over 27% in just one month over the coronavirus pandemic; how you can ride the recovery when the market reaction to COVID-19 emerges as excessive

Kumar Shankar Roy Mar 20, 2020

Index FundsWith volatility at its peak and markets in a depressing mood, direct purchases in stocks are quite a risk. You may get stocks at multi-year lows or at a price that is extremely attractive, but can you post-purchase see it drop quite a bit further? Plus, the global equities mood is poor and that affects the Indian market further, pulling down even beaten-down stocks little by little. Also when there is a recovery, even when the index recovers some of the stocks you purchased may not recover as fast as the index.

This is why a portfolio approach is a safe and sound way of investing in Indian markets for retail investors. Index mutual funds offer a convenient way to invest in stocks. Instead of paying fancy fees for star fund managers in actively managed funds, consider index mutual funds that can do the same job at a much lower cost. Since index funds mimic an index of stocks like Nifty, Sensex, Nifty 100, BSE 100, etc., you get exposure to a handy stock portfolio list by merely buying index funds. The two main questions for any potential index fund investor are 1. What to buy in index funds, 2. What to look for before buying index funds. RupeeIQ answers both those questions.

What you can buy

You simply need a mutual fund account to buy index funds. This can be done online. For index mutual funds, there is no need to open a demat account, etc. We can argue this makes index mutual funds more convenient than exchange-traded funds (ETFs).

Your index mutual funds options are limited to the availability in the market. We found that there are broadly 8 types of index categories at present each mimicking an existing index/benchmark viz. Nifty 500, Nifty 100, Nifty 50, Nifty Bank, Nifty Midcap 150, Nifty Next 50 (Junior Nifty), Nifty Smallcap 250, and Sensex.

Out of these 8 categories, 3 viz. Nifty 50, Sensex and Nifty Next 50, are populated with multiple options. The other 5 are quite new and do not have many options to choose from.

What to look for

Index funds offer low cost, hence expense ratio i.e. what it costs you as an investor, is an important metric to look at. Regular plans (bought from MF distributors) of index mutual funds have an expense ratio of 0.17 to 1.36. The lower the expense ratio, the better is for the investor. For example, if you invest Rs 20,000 in a fund with an expense ratio of 1.5%, then you are paying the fund Rs 300 a year to manage your money. In other words, if a fund earns 10% and has a 1.5% expense ratio, it would mean an 8.5% return for an investor.

Fund NAVs (net asset values) are reported net of fees and expenses. Just buying one stock in each of Nifty 50 constituents will cost you Rs 76,000, but copying an index requires weight allocation to various stocks as they are in the index. Buying just 10 stocks in their Nifty like weight will cost you Rs 60,000 and so you can imagine the cost of buying the entire Nifty 50 set. In comparison, one can start off with just Rs 5,000 lumpsum in most Nifty index funds. A cheaper index mutual fund is a potent way to maximize returns because you are paying very less to get index-like returns, which half of the actively managed mutual funds will find difficult to beat.

Index mutual funds track an index. But, the tracking is often not complete. Tracking error is the difference between a mutual fund portfolio’s returns and the benchmark index it was designed to copy. The tracking error is usually because the index fund accumulates cash, to pay out any investor redemption as well as manage inflows. By holding some cash, the fund is not 100% fully invested in the indexes’ underlying holdings, and hence does not track it 100%.

In the 1-year period ended March 17, 2020, HDFC Index Fund – Sensex Plan NAV is down 19.1% when the Sensex is down 18.55%. Tracking error should be analysed over larger periods of time period such as 3 or 5 years. An index fund may have a short term tracking error but, things are set right over the long-term unless investors continuously pull out money and the fund becomes incrementally small. A tracking error of up to 0.5% is acceptable.

Index funds you may consider

* Cheapest – UTI Nifty Index Fund is a largecap index mutual fund with an expense ratio (regular) of 0.17. This is the cheapest in the industry. The direct plan costs even less at 0.1. The UTI Nifty Index Fund also happens to be the largest index mutual fund with an asset size of over Rs 1,850 crore (last month-end).

The other cheapest Sensex based index mutual funds are HDFC Index Fund – Sensex Plan and ICICI Prudential Sensex Index Fund, both of which have an expense ratio of 0.3.

* Lowest tracking error – In terms of tracking error, we looked at index mutual funds with 1, 3 and 5 year NAV history.

Only 3 Nifty based index funds meet the up to 0.5% tracking error criteria in all the 1, 3 and 5 year periods. They are IDFC Nifty Fund, UTI Nifty Index Fund, and HDFC Index Fund Nifty 50 Plan.

In the Sensex-based index funds, there is not a single fund that meets the up to 0.5% tracking error criteria in all the 1, 3 and 5 year periods. Tata Index Sensex Fund comes the closest by virtue of its tracking error in 1 and 3 year time periods. HDFC Index Fund – Sensex Plan is the lone scheme that meets tracking error criteria in the 5 year period (only).

Beyond Nifty 50 and Sensex 30

* Unique index fund options – If you want to move beyond the Nifty and Sensex options, you will have to look at products that are based on indices like Nifty 500, Nifty 100, Nifty Bank, Nifty Midcap 150, Nifty Next 50 and Nifty Smallcap 250. But, most do not have a long enough track record that can help you understand their tracking error behaviour. So, that risk exists.

Nifty 500 – Motilal Oswal Nifty 500 Fund is the only option. This is a new fund (launched in Sep-2019). It has an expense ratio of 1.03. Exit load is 1% if your investment is redeemed on or before 3 months from the date of allotment. Think of Nifty 500 as a multicap alternative.

Nifty 100 – Axis Nifty 100 Index Fund is the only option. Launched just a few months back in Oct-2019, this fund has gathered quite a bit of assets at Rs 305 crore. It has an expense ratio of 1.01. Exit load is 1% if redeemed within 7 days from the date of investment. This is a largecap option.

Nifty Junior/ Nifty Next 50 – There are 4 options, but IDBI Nifty Junior Index Fund is the only one with a 1, 3 and 5 year track record. It does not meet our tracking error criteria of up to 0.5%. UTI Nifty Next 50 Index Fund has the largest product in this sub-category with Rs 540 crore assets. This is a largecap option.

Nifty Bank – There is only option i.e. Motilal Oswal Nifty Bank Index Fund that was launched in Sep-2019. It has an expense ratio of 1.03. The Nifty Bank index fund offers a concentrated sector-heavy index play, which is suitable for those with a very high-risk appetite.

Nifty Midcap 150 – The lone option here is Motilal Oswal Nifty Midcap 150 Index Fund, also launched in Sep-2019. It has an expense ratio of 1.03. This is a midcap play, which is okay for those with a high-risk appetite.

Nifty Smallcap 250 – The only option here is Motilal Oswal Nifty Smallcap 250 Index Fund, also launched in Sep-2019. It has an expense ratio of 1.03. This is a smallcap play, which is ideal for those with a very high-risk appetite. Do bear in mind that smallcaps suffer from the lowest liquidity during market downturns and investments can be hard to exit.

Here is a table enumerating the biggest index funds and their performance. We have also given their target index performance so that comparison can be made.

Top index funds

Name 1 Yr (%) 3 Yr (%) 5 Yr (%) Net Assets Rs Cr Exp Ratio
ICICI Prudential Nifty Index Fund -20.74 -0.34 1 565 0.45
SBI Nifty Index Fund -21.28 -0.33 0.92 548 0.69
UTI Nifty Index Fund  -20.76 0.21 1.47 1856 0.17
HDFC Index Fund Nifty 50 Plan -20.84 0.12 1.43 1059 0.3
UTI Nifty Next 50 Index Fund  -20.44 540 0.86
HDFC Index Fund – Sensex Plan -19.1 1.69 2.2 803 0.3
Nifty 50 TRI -20.42 0.59 1.85
S&P BSE Sensex -18.55 2.24 2.58
Nifty Next 50 TRI (Nifty Junior) -20.1 -2.7 3.4
Upto March 17, 2020        


Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at

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