How to Choose an Index Fund
Every Nifty 50 index fund owns the same 50 companies in the same proportions. The choice between them comes down to what each charges and how closely it copies the index, and both are published every month.
Figures checked · How we calculate
76%of active large-cap funds that trailed their index over the ten years to December 2025
S&P Dow Jones Indices compares every Indian active fund with an index of the same kind of shares. Over the ten years to December 2025, 76.3% of large-cap funds returned less than the S&P India LargeMidCap index. Over five years, 84.4% did.
An index fund doesn't try to beat its index. It promises to trail it by a little, the cost of running the fund. That modest promise beat three out of four professional fund managers.
Choose the index first. The fund is the easy part
The index decides almost all of your return. Two funds tracking the same index differ by a few tenths of a percent a year. Two different indices can differ by ten percentage points in a single year.
| Index | What it holds | What to expect |
|---|---|---|
| Nifty 50, Sensex | The 50 (or 30) largest listed companies | The core of most portfolios. The two overlap heavily, so owning both adds little. |
| Nifty Next 50 | Companies ranked 51 to 100 | Bigger swings than the Nifty 50, both up and down. |
| Nifty 500, Nifty Total Market | Large, mid and small companies in market proportions | The whole market in one fund. Mostly large companies by weight. |
| Nifty Midcap 150, Smallcap 250 | Mid-sized or small companies only | Larger falls in bad years. For money you won't need for ten years or more. |
| Factor indices (momentum, low volatility, equal weight, quality) | A rule applied to a broad index | See below. |
For a first index fund, a Nifty 50 fund or a Nifty 500 fund is enough. Many people never need a second.
Factor indices deserve caution for a specific reason. Their rules were designed by people who could already see how the rules would have done in the past, and the index is published with that back-tested history. How a factor will do after launch is unknown. Some have done well, some have not, and the back-test can't tell you which will.
Buy the direct plan, growth option. Nothing else
Index funds come in direct and regular plans like every other fund. The regular plan pays a distributor, and because an index fund's own fee is tiny, the commission can be the largest part of what you pay.
- Direct plan at 0.06% a year₹1.88 CrThe cheapest Nifty 50 index funds in September 2026.
- Direct plan at 0.20% a year₹1.83 CrA typical direct plan from a large fund house.
- Regular plan at 0.70% a year₹1.68 CrThe same shares, with a distributor's commission added.
- What the regular plan costs over the 0.20% direct plan₹15.5 LMore than half of the ₹30 lakh you paid in.
12% a year before costs, compounded monthly. Nifty 50 index funds' direct plans charged roughly 0.06% to 0.22% a year in September 2026. The 0.70% regular plan is illustrative. Check the factsheet of the fund you are considering.
The growth option reinvests dividends inside the fund. The other option, IDCW, pays them out to you, and they're taxed at your slab rate in the year you receive them. For money you're building up, growth is the right choice.
Tracking difference is what you actually lost to the fund
The expense ratio is what the fund says it charges. Tracking difference is what it actually cost you: the index's return minus the fund's return. It includes the expense ratio plus the cost of trading, the cash the fund keeps for redemptions, and how well the manager handles changes to the index.
Three rules make the comparison fair:
- Compare against the Total Return Index (TRI), which assumes dividends are reinvested, as the fund does. The plain Nifty 50 figure ignores dividends and makes every fund look better than it is.
- Use three- or five-year figures when the fund is old enough. One year can flatter a fund that happened to hold extra cash in a falling month.
- Look at tracking error too. Tracking error measures how erratically the fund follows the index from day to day. SEBI caps it at 2% for equity index funds and ETFs. A low tracking difference with a high tracking error means the fund got lucky.
Since July 2022, SEBI has required every index fund and ETF to publish tracking difference every month, over one, three, five and ten years. You'll find it on the fund's factsheet and on AMFI's website. You don't need a paid tool.
- Tracking difference of 0.2% a year₹93.1 L
- Tracking difference of 0.5% a year₹88.2 L
- What 0.3 percentage points cost₹4.9 LSame index, same shares. Only how closely the fund follows them differs.
Index at 12% a year. Tracking difference taken off the return every year.
An index fund or an ETF on the same index
An ETF (exchange-traded fund) holds the same shares as an index fund but is bought and sold on the stock exchange like a share. The choice is about convenience and small costs, not returns.
| Index fund | ETF | |
|---|---|---|
| Account needed | None beyond KYC. Buy from the fund house or MF Central | A demat and trading account |
| How you buy | Any amount at the day's NAV, including a monthly SIP | Whole units at the market price while the market is open |
| Costs | Expense ratio | Usually a lower expense ratio, plus brokerage, the gap between buy and sell prices, and a DP charge when you sell |
| Main risk | Tracking difference | The ETF can trade above or below the value of its holdings when few people are trading it |
Check that an ETF trades in real volume before you buy it. Exchanges publish the ETF's iNAV, the live value of what it holds. If the price you are about to pay is well above the iNAV, you are paying a premium that can disappear.
A monthly ₹10,000 ETF purchase costs about ₹2 in charges at a zero-brokerage broker and about ₹14 at a broker charging ₹20 or 0.1% per order. See what a trade costs for the breakdown. For a SIP from salary, the index fund is simpler. For a large lump sum with a demat account you already have, a well-traded ETF can work out cheaper.