Fund Types · Chapter 6 / 35
Index funds and ETFs — passive investing in India
Lower expense, simpler logic, and a hard time being beaten by active large-cap funds over long horizons.
An index fund doesn't try to pick winners. It buys every stock in a chosen index (Nifty 50, Sensex, Nifty Next 50, Nifty Bank, etc.) in the same weights, and rebalances when the index does. The result: returns that mirror the index, minus a small annual expense.
Index funds vs ETFs
| Feature | Index fund | ETF |
|---|---|---|
| How you buy | Like any mutual fund (NAV-based) | Like a stock (demat required) |
| Pricing | End-of-day NAV | Live intraday |
| Expense ratio | Slightly higher than ETF (0.10-0.30%) | Slightly lower (0.05-0.20%) |
| SIP-friendly | Yes, natively | Requires platform support, less seamless |
| Bid-ask spread | Not applicable | 0.05-0.30% on liquid ETFs, more on illiquid |
Why passive matters in large-cap
SPIVA-style reports tracking active vs benchmark performance in Indian large-cap consistently show that 60-80% of active large-cap funds underperform the Nifty 100 over 10-year windows. The reason: information about top-100 names is widely available; alpha is hard to extract net of fees.
For mid- and small-cap, active managers have historically delivered more outperformance — though with much higher dispersion in outcomes.
Tracking error
An index fund doesn't perfectly match the index. The gap (called tracking error) comes from:
- Expense ratio (the steady drag).
- Cash drag (small cash buffer for redemptions).
- Rebalancing costs.
- Securities lending income (which can offset costs slightly).
Tracking error of 0.10-0.30% per year is typical for well-run large-cap index funds.
The Indian passive shelf
Beyond plain Nifty 50 / Sensex, several index categories are now available:
- Broad-market: Nifty 50, Nifty Next 50, Nifty 100, Nifty Midcap 150, Nifty Smallcap 250.
- Sectoral: Bank, IT, Pharma, FMCG.
- Factor: Quality, Value, Low Volatility, Momentum.
- International: Nasdaq 100, S&P 500 (typically as Fund-of-Funds).
When active still adds value
Smaller-cap segments, sectoral picks with manager skill, and special situations (corporate events, deep-value plays) remain areas where active funds can justify higher fees. For a typical long-term portfolio, the core can be passive and the satellite active.
Sources
- SEBI — Index Funds and ETFs Regulatory Framework · accessed Jun 2026
- AMFI — Index Funds and ETFs Investor Education · accessed Jun 2026