Globally passive investing is becoming increasingly popular. In India, too, it has gathered steam. At present, there are over 70 index funds in the country.
For the uninitiated, these passive funds mirror an index—they invest in the same stocks as the index they are tracking and in the same proportion.
Passive funds are generally of two kinds—index funds and exchange-traded funds (ETFs). For investing in ETFs, you need a demat account as they can be bought and sold on the stock exchange, just like stocks.
On the other hand, in index funds, you can buy the units from the fund house like any other mutual fund.
If you don’t have a Demat account and are planning to invest in passive funds, index funds are the way to go. However, selecting the one right can be challenging. This blog will explain how you can choose an index fund that’s right for you.
Financial Planning With Index Funds
With the number of index schemes on the rise, you can find an alternative to all major active mutual fund categories. There are large-cap, mid-cap and small-cap index funds. You can even find a replacement for multi-cap and Flexi Cap categories. If you want to take exposure to sectors, some ETFs track sectoral indices like Information Technology, Healthcare, Auto, etc.
With so much variety available, it’s easy to rely on index funds for your entire financial planning.
Let’s look at each category of equity funds and their index fund alternatives.
Large Cap Index Investment Options
In the large-cap space, passive funds track six indices. These include three from NSE and an equal number from BSE.
| Indices | Largest Schemes |
| NIFTY 50 | SBI ETF Nifty 50 |
| BSE Sensex | SBI ETF Sensex |
| NIFTY Next 50 | ICICI Pru NIFTY Next 50 Index |
| S&P BSE Sensex Next 50 | UTI S&P BSE Sensex Next 50 ETF |
| NIFTY 100 | Axis NIFTY 100 Index |
| S&P BSE 100 | SBI ETF BSE 100 |
Performance Of Large Cap Indices
To understand how each index has performed, we looked at the rolling returns for 15 years. Rolling returns will tell you what could have been your returns if you had entered for a three- or a five-year period in the past decade and a half.
Data shows the NIFTY NEXT 50 index has offered the highest returns. However, it can be volatile in the short term (three years) – it could fall more than other indices.
Should you then invest in NIFTY NEXT 50 when choosing a large-cap index fund? A better option will be to split your investments in NIFTY 50 and NIFTY NEXT 50. If you do this, you don’t need to invest in NIFTY 100 or SENSEX 100 indices, as they have the same stocks as the other two indices.
| Benchmark | Periodicity | Max. | Min. | Average |
| Rolling Data: 13-Jun-2007 To 13-Jun-2022 | ||||
| NIFTY 100 – TRI | 5 Year | 46.93 | -0.75 | 14.25 |
| NIFTY 50 – TRI | 5 Year | 47.18 | -1.03 | 14.77 |
| NIFTY NEXT 50 – TRI | 5 Year | 59.09 | 0.26 | 16.62 |
| S&P BSE 100 – TRI | 5 Year | 23.69 | -1.01 | 12.40 |
| S&P BSE SENSEX – TRI | 5 Year | 49.84 | -0.30 | 15.20 |
| S&P BSE Sensex Next 50 – TRI | 5 Year | 22.30 | -2.65 | 12.77 |
| Rolling Data: 13-Jun-2012 To 13-Jun-2022 | ||||
| NIFTY 100 – TRI | 3 Year | 24.91 | -4.98 | 11.75 |
| NIFTY 50 – TRI | 3 Year | 23.55 | -4.46 | 11.35 |
| NIFTY NEXT 50 – TRI | 3 Year | 33.04 | -8.00 | 13.64 |
| S&P BSE 100 – TRI | 3 Year | 24.51 | -5.21 | 11.51 |
| S&P BSE SENSEX – TRI | 3 Year | 23.92 | -2.78 | 11.67 |
| S&P BSE Sensex Next 50 – TRI | 3 Year | 29.93 | -11.49 | 11.44 |
Broader Market Index Funds
Investors looking at a broader and more diversified index to invest in have three options. These funds are an alternative to actively managed multi-cap funds.
| Multi-Cap indices | Largest schemes |
| NIFTY 500 | Motilal Oswal Nifty 500 |
| S&P BSE 500 | ICICI Pru S&P BSE 500 ETF |
| NIFTY Large Midcap 250 | Edelweiss Large & Midcap Index Fund |
Performance Of Broader Indices
In the long term, NIFTY 500 has offered better returns than the other two indices. However, the Nifty LargeMidcap 250 Index can be slightly less volatile than the other two due to the absence of small-cap stocks.
| CAGR | ||||
| Benchmark | Calculated On Periodicity | Max. | Min. | Average |
| Rolling Data: 13-Jun-2007 To 13-Jun-2022 | ||||
| NIFTY 500 – TRI | 5 Year | 51.31 | -1.40 | 15.11 |
| NIFTY LargeMidcap 250 Index – TRI | 5 Year | 24.74 | -1.50 | 13.31 |
| S&P BSE 500 – TRI | 5 Year | 23.63 | -0.96 | 12.78 |
| Rolling Data: 13-Jun-2012 To 13-Jun-2022 | ||||
| NIFTY 500 – TRI | 3 Year | 25.40 | -6.31 | 11.63 |
| NIFTY LargeMidcap 250 Index – TRI | 3 Year | 29.31 | -6.57 | 13.26 |
| S&P BSE 500 – TRI | 3 Year | 25.31 | -6.18 | 11.77 |
Mid Cap Investment Options
Mid-cap indices typically have 150 companies. However, some funds only look at the top 50 mid-cap companies. That gives investors three options.
| Mid-cap indices | Largest schemes |
| Nifty Midcap 150 | ABSL Nifty Midcap 150 Index ICICI Pru Midcap 150 Index |
| NIFTY Midcap 50 | Axis Nifty Midcap 50 Index |
| S&P BSE Midcap Select | ICICI Prudential Midcap Select ETF |
Performance Of Mid Cap Indices
Without a doubt, Nifty Midcap 150 is one of the best indices among the mid-cap. It is less volatile than others while generating better returns. It is valid for the short as well as the long term.
| CAGR | ||||
| Benchmark | Calculated On Periodicity | Max. | Min. | Average |
| Rolling Data: 13-Jun-2007 To 13-Jun-2022 | ||||
| NIFTY Midcap 150 – TRI | 5 Year | 29.10 | -2.34 | 14.54 |
| NIFTY Midcap 50 – TRI | 5 Year | 26.36 | -7.86 | 10.69 |
| S&P BSE MidSmallCap – TRI | 5 Year | 26.71 | -2.16 | 13.91 |
| Rolling Data: 13-Jun-2012 To 13-Jun-2022 | ||||
| NIFTY Midcap 150 – TRI | 3 Year | 36.08 | -8.29 | 14.79 |
| NIFTY Midcap 50 – TRI | 3 Year | 31.45 | -14.73 | 10.80 |
| S&P BSE MidSmallCap – TRI | 3 Year | 33.88 | -11.88 | 12.47 |
Small Cap Index Investment Options
In small-cap indices, too, investors can choose from two different options. One index covers all 250 small-cap companies. The other focuses on the top 50 small-cap stocks.
| Small-cap indices | Largest schemes |
| Nifty Smallcap 250 | Nippon Ind Nifty Smallcap 250 Index |
| NIFTY Smallcap 50 TRI | Aditya Birla SL Nifty Smallcap 50 Index |
However, small caps are best-suited for tactical bets unless the investor is genuinely looking at a long-term horizon. Tactical bets mean investors need to enter small-cap stocks at attractive valuations and exit when they are high. But it’s easier said than done.
If you still decide to invest in a small-cap index, limit your allocation to 20-25% of the equity portfolio at max.
How To Choose the Right Index Fund For You?
If you are looking at index investing, it’s better to go with a broader index than select a few stocks in any segment. Therefore, avoid indices like Small Cap 50 and Mid Cap 50.
If you compare the small-cap index with the mid-cap index, you will realise why the small-cap should be tactical. Nifty Midcap 150 index has an average return of 14.54% in five years, higher than the small-cap index. It also fell less in different market conditions. Therefore, the concept of high-risk, high-reward doesn’t seem to hold when it comes to small-caps.
| CAGR | ||||
| Benchmark | Calculated On Periodicity | Max. | Min. | Average |
| Rolling Data: 13-Jun-2007 To 13-Jun-2022 | ||||
| NIFTY Smallcap 250 – TRI | 5 Year | 27.72 | -6.16 | 11.74 |
| NIFTY Smallcap 50 – TRI | 5 Year | 25.48 | -11.39 | 7.43 |
| Rolling Data: 13-Jun-2012 To 13-Jun-2022 | ||||
| NIFTY Smallcap 250 – TRI | 3 Year | 38.54 | -17.51 | 11.42 |
| NIFTY Smallcap 50 – TRI | 3 Year | 37.18 | -23.89 | 6.95 |
Bottom Line
When investing in index funds, you must be careful about the fund and the category you pick. The good news is that if you are a passive investor, you have index fund alternatives to major equity categories. You can now build a portfolio using only passive funds. Before selecting a fund, compare the tracking error and expense ratio.
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