5 Top Performing Index Funds in India in the Last 3 Years

October 10, 2024 Mutual Fund

Investors seeking cost-effective, long-term growth increasingly gravitate toward index funds. Over the past decade, the substantial growth in India’s equity markets has driven interest in these index funds, which follow benchmark indices like the Nifty 50 and Sensex. Their growing appeal stems from their straightforward structure, transparency, and minimal fees.

Index funds represent a simple yet effective investment vehicle, offering investors the opportunity to grow their wealth by mirroring the performance of a market index. As passive investment strategies gain traction, index funds have emerged as a go-to option for investors seeking consistent market returns without the complexities of active stock picking.

Index funds are ideal for investors seeking to match market performance rather than outperform it. Since these funds track an index, they provide broad market exposure and are suitable for long-term investors who want to avoid the risk of underperforming the market.

In a rising market scenario like that of 2024, active fund managers may struggle to consistently outperform their benchmarks due to increased volatility and stock-specific risks. However, passive funds eliminate these challenges by providing diversified exposure at a fraction of the cost, enabling investors to participate in market rallies while minimizing the risk of underperformance.

[Read: 15 Top-Rated Mutual Funds for Equity Investors]

The Growth of Index Funds in India’s Mutual Fund Industry

In the early 2010s, index funds were relatively obscure in India, with investors primarily focusing on actively managed mutual funds, where fund managers aimed to outperform the market. However, as investors grew more aware of the limitations and costs associated with active management, particularly the risk of underperformance and high expense ratios, the focus shifted toward passive investing.

In the last 10 years, India’s equity market has shown significant growth, with benchmark indices like the Nifty 50 and Sensex delivering impressive returns. During this period, index funds tracking these indices have grown in popularity. As markets become more efficient with, it has become increasingly difficult for active fund managers to consistently beat the market. As a result, passive investing through index funds has emerged as a logical alternative for investors who are looking for dependable market returns.

Globally, passive investing has seen tremendous growth, particularly in the U.S. and European markets, where Exchange Traded Funds (ETFs) and index funds have attracted trillions of dollars in assets. India is now following this global trend, with a surge in both index funds and ETFs in recent years.

Looking at this investor traction towards passive funds, the Securities and Exchange Board of India (SEBI) has introduced several regulatory changes to make mutual fund investments more transparent and investor-friendly.

Recently on September 30, 2024, SEBI announced the introduction of a new regulatory framework known as Mutual Fund Lite (MF Lite), tailored for fund houses that focus on passively managed schemes. This regulation has significant implications for passive funds, including index funds, as it focuses on reducing complexity and lowering costs in the mutual fund industry.

The lighter regulations cover eligibility criteria for sponsors (e.g., net worth, track record), trustee responsibilities, approval processes, and disclosures. This framework aims to simplify market entry, attract new players, reduce compliance, boost market liquidity, diversify investments, and promote innovation.

[Read: How to Choose Mutual Funds at a Market High]

Selecting the top-performing index funds can be a daunting task for many investors, especially with the variety of options available in the market. While index funds are inherently simpler than actively managed funds, choosing the right one still requires careful analysis. Factors like the index the fund tracks, its historical performance, expense ratios, tracking error, and overall market conditions all come into play.

By examining key metrics and considering the market’s evolving landscape, we help you identify which funds have consistently performed at par with their benchmarks and could be a part of your portfolio based on suitability.

#1 – Nippon India Nifty Smallcap 250 Index Fund

Launched in October 2020, the Nippon India Nifty Smallcap 250 Index Fund is a passive investment fund that tracks the Nifty Smallcap 250 Index, providing investors with exposure to a broad spectrum of small-cap companies in India.

The fund follows a passive investment strategy, it does not engage in stock picking or market timing. Instead, it buys and holds all the stocks in the index in the same proportion, allowing investors to benefit from the overall performance of India’s small-cap market.

Data as of September 30, 2024
(Source: NSE – Nifty Smallcap 250 TRI) 

Nippon India Nifty Smallcap 250 Index Fund is structured to have a low expense ratio at 0.35% for direct plan and 0.96% for regular plan, which enhances its attractiveness compared to actively managed small-cap funds. Keeping costs low is crucial in passive funds, as it helps investors retain more of the market returns.

Data as of October 09, 2024
Past performance is not an indicator of future returns.
The securities quoted are for illustration only and are not recommendatory
(Source: ACE MF, data collated by PersonalFN Research) 

The fund has shown impressive returns, especially in the past year, reflecting the growth in the small-cap segment. With a 1-year return of 53.86%, it stands out as a top performer in the small-cap space. Over three years, the CAGR is also strong at 28.89%, making it ideal for high-risk investors looking for long-term gains from small-cap companies. This fund has benefited from India’s economic recovery and the high growth potential of emerging companies.

Nippon India Nifty Smallcap 250 Index Fund can be a compelling choice for investors seeking exposure to India’s small-cap segment. With the potential for high returns over the long term, coupled with the benefits of low costs and broad diversification, this fund is suited for those who are willing to embrace the risk and volatility that come with small-cap investing.

#2 – Motilal Oswal Nifty Midcap 150 Index Fund

The primary objective of the Motilal Oswal Nifty Midcap 150 Index Fund is to achieve returns that closely correspond to the performance of the Nifty Midcap 150 Index, subject to tracking errors. Being a passively managed fund, it invests in the same companies as the index in the same proportions, thereby eliminating the need for active stock-picking by fund managers.

The fund predominantly invests in midcap stocks, which are generally considered to have higher growth potential than large-cap stocks but also come with greater volatility. The midcap segment can offer investors the opportunity to capture the growth of emerging companies that have the potential to become large-cap giants in the future.

Data as of September 30, 2024
(Source: NSE – Nifty Smallcap 250 TRI) 

Given the highly risky nature of midcaps, the fund may be more volatile than large-cap index funds, making it better suited for investors with a moderate to high risk tolerance and a long-term investment horizon. The Direct Plan of the fund comes with a lower expense ratio at 0.30% compared to the regular plan which is at 1.00%. This is particularly advantageous for investors as it enhances overall returns by minimizing the cost of investment.

Data as of October 09, 2024
Past performance is not an indicator of future returns.
The securities quoted are for illustration only and are not recommendatory
(Source: ACE MF, data collated by PersonalFN Research) 

The scheme has also shown strong performance, with an absolute return of 48.67% over the last year. Its 3-year CAGR of 28.06% reflects its solid growth potential in the mid-cap segment. Notably, the fund has a remarkable 5-year CAGR of 31.13%, indicating that it has significantly outperformed its peers over a longer duration. This performance makes it a compelling option for investors looking to capture growth in mid-sized companies.

The strong returns may be attributed to the performance of mid-cap stocks, which are often more volatile but offer greater growth opportunities compared to large-cap stocks. The fund’s strategy to mirror the Nifty Midcap 150 Index allows it to capture significant gains from companies that are well-positioned for growth, benefiting from increased consumption and investment in various sectors.

Motilal Oswal Nifty Midcap 150 Index Fund is a compelling choice for investors seeking a diversified, cost-effective way to gain exposure to the midcap segment of the Indian equity market. By leveraging a passive investment strategy, this fund provides a straightforward approach for those looking to capitalize on the growth potential of mid-sized companies.

#3 – DSP NIFTY Next 50 Index Fund

Launched in February 2019, DSP NIFTY Next 50 Index Fund aims to provide returns that closely match the performance of the NIFTY Next 50 Index, subject to tracking errors. This index comprises the 50 largest companies on the National Stock Exchange (NSE) that are not included in the NIFTY 50 Index, effectively representing the next tier of large-cap stocks in India.

The fund is designed for investors looking to gain exposure to a diverse set of companies that are poised for growth and could potentially join the ranks of India’s top 50 companies in the future. The fund focuses on mid to large-cap stocks that are generally considered to have strong growth potential.

By investing in the NIFTY Next 50, the fund captures companies that are likely to benefit from structural growth in the Indian economy, thus providing an opportunity for capital appreciation.

Data as of September 30, 2024
(Source: NSE – Nifty Smallcap 250 TRI) 

The fund holds a diversified portfolio of 50 stocks across various sectors, including banking, consumer goods, healthcare, and technology. This diversification helps mitigate risks associated with investing in individual stocks and provides exposure to different segments of the economy. DSP NIFTY Next 50 Index Fund features a low expense ratio at 0.28% under the direct plan, which is an essential factor for passive investors. Lower fees help investors retain more of their returns over time, making it a cost-effective investment option.

Data as of October 09, 2024
Past performance is not an indicator of future returns.
The securities quoted are for illustration only and are not recommendatory
(Source: ACE MF, data collated by PersonalFN Research) 

DSP NIFTY Next 50 Index Fund has also shown a robust 1-year absolute return of 48.15%. With a 3-year CAGR of 20.74% and a 5-year CAGR of 20.79%, this fund has established itself as a reliable performer. The Next 50 index consists of companies that are potential candidates for inclusion in the Nifty 50, which can lead to substantial gains as these firms grow and gain market share.

The fund’s performance reflects not just the potential of these companies, but also the overall market sentiment towards growth stocks, particularly in sectors experiencing innovation and expansion. The steady returns over the longer term signify the fund’s resilience in varying market conditions, making it an appealing option for investors seeking long-term capital appreciation.

The fund provides exposure to emerging companies that have the potential to grow significantly, making it a suitable choice for investors with a long investment horizon. Given that the fund invests in mid to large-cap stocks, it is best suited for investors with a moderate risk appetite, as the performance can be more volatile than that of pure large-cap funds.

#4 – Motilal Oswal Nifty 500 Index Fund

Launched in September 2019, Motilal Oswal Nifty 500 Index Fund is to provide returns that closely correspond to the performance of the Nifty 500 Index. The scheme aims to replicate the performance of the Nifty 500 Index, which comprises the top 500 companies listed on the National Stock Exchange (NSE) based on market capitalization.

This fund offers investors a diversified portfolio across large-cap, mid-cap, and small-cap segments, capturing a broad representation of the Indian stock market. This strategy allows investors to gain exposure to the entire spectrum of the Indian equity market without the need for extensive research or stock selection.

Data as of September 30, 2024
(Source: NSE – Nifty Smallcap 250 TRI) 

Motilal Oswal Nifty 500 Index Fund is designed with a low expense ratio at 0.20% under direct plan, which is typical of passive funds. This cost-effectiveness allows investors to retain a larger portion of their returns over time, enhancing their overall investment performance. The fund’s focus on a broad index helps it capture the overall growth trends of the Indian economy, while the passive strategy minimizes the risks associated with active management.

Data as of October 09, 2024
Past performance is not an indicator of future returns.
The securities quoted are for illustration only and are not recommendatory
(Source: ACE MF, data collated by PersonalFN Research) 

Motilal Oswal Nifty 500 Index Fund has provided a 1-year absolute return of 32.10%, indicating a healthy performance relative to the broader market. Its 3-year CAGR of 19.06% and 5-year CAGR of 21.89% show that the fund has been able to deliver consistent returns while encompassing a diverse range of large, mid, and small-cap stocks.

This diversified approach mitigates risks associated with market volatility and allows investors to benefit from the overall growth of the Indian economy. The Nifty 500 index includes a wide variety of sectors, which helps the fund capture performance across various economic cycles. As a result, it serves as a balanced investment option for those looking for steady growth.

As of 2024, the Motilal Oswal Nifty 500 Index Fund has shown performance in line with the Nifty 500 Index, making it a viable option for investors seeking market returns. The scheme is suitable for investors looking to build wealth over an extended period by participating in the growth of the entire market. This fund serves as an excellent entry point for beginners who want to invest in the stock market without the complexities of stock selection and active management.

#5 – Bandhan Nifty 50 Index Fund

Launched in April 2010, Bandhan Nifty 50 Index Fund is a passive equity mutual fund that aims to replicate the performance of the Nifty 50 Index, which consists of the top 50 large-cap stocks listed on the National Stock Exchange (NSE) of India.

This fund provides investors with broad exposure to the Indian equity market by investing in the same companies that constitute the Nifty 50, thereby reflecting the overall performance of the Indian economy. This strategy allows investors to gain exposure to large-cap stocks, which are typically more stable and less volatile compared to mid and small-cap stocks.

Data as of September 30, 2024
(Source: NSE – Nifty Smallcap 250 TRI) 

As a passive fund, the Bandhan Nifty 50 Index Fund comes with a lower expense ratio at 0.10% under direct plan. This cost efficiency is crucial for long-term investors, as lower fees can significantly enhance overall returns. The fund aims to maintain a minimal tracking error, which ensures that its performance closely aligns with that of the Nifty 50 Index.

Data as of October 09, 2024
Past performance is not an indicator of future returns.
The securities quoted are for illustration only and are not recommendatory
(Source: ACE MF, data collated by PersonalFN Research) 

Bandhan Nifty 50 Index Fund has recorded a 1-year absolute return of 23.37%. While this is respectable, it trails behind the other funds in this analysis. Over the longer term, the fund exhibits a 3-year CAGR of 16.09%, a 5-year CAGR of 16.31%, and further declines in the 7-year (14.96%) and 10-year (13.71%) CAGRs. This performance indicates a relatively stable yet lower growth trajectory compared to the more aggressive small and mid-cap funds.

Being focused on the Nifty 50, which comprises India’s largest companies, the fund is more susceptible to market corrections and less able to capitalize on the rapid growth of smaller firms. However, it provides a reliable option for conservative investors seeking to invest in well-established companies with stable earnings.

For individuals who are new to investing and may not have the expertise to pick stocks, this fund provides a simple way to gain exposure to a diversified portfolio of leading companies in India. Those who prefer a hands-off approach to investing can benefit from the passive management style of the fund, which requires minimal decision-making as compared to actively managed funds.

To conclude…

Looking ahead, the future of index funds in India appears promising. With the Indian economy poised for growth, driven by robust domestic consumption, government initiatives, and increasing foreign investments, the equity market is expected to experience a positive trajectory. This macroeconomic backdrop will likely benefit index funds that track broader market indices, such as the Nifty 50, Nifty 500, and various sectoral indices. As companies in these indices continue to demonstrate resilience and adaptability, investors can anticipate attractive returns over the long term.

However, investors must remain vigilant and consider potential market challenges. While index funds can provide a strong foundation for investment portfolios, a balanced approach that includes both equity and fixed-income assets will help mitigate risks during uncertain times.

This article first appeared on PersonalFN here