Investors are often told that if they want a all-weather, low-cost and hassle-free experience, they should select index mutual funds (index funds). An index fund is a portfolio designed to mimic the composition and performance of a financial market index such as Sensex or Nifty. They are usually cheaper than other funds. But with so many index fund options out there, selecting the best one can be a daunting task if you are a newcomer. You can either get the services of an investment advisor who will guide you, or you can do some research on your own. In this article, we will aim to help the latter segment by giving you alternatives across various parameters.

Nifty index fund basics

If passive investing is a bicycle, index funds and exchange traded funds (ETFs) are its two wheels. For investing in ETFs, you need a demat account but in case of index funds, you can buy the units from the fund house like any other mutual fund.

Index funds are based on various indices such Sensex, Nifty, Nifty Next 50, Nifty 100, Nifty 500, Nifty Midcap or Smallcap variants. In the pure largecap index space, Nifty 50 is a good option.

The Nifty 50 index is a well-diversified 50 companies index reflecting overall market conditions. It is computed using the free float market capitalisation method. In this article, we will look at Nifty 50 Total Returns Index (TRI) given that it is the benchmark for many products. ACEMF has data for 22 Nifty-based index funds.

Investors are often asked to consider index funds options based on a few factors such as fund size, expense ratio (cost for investor), tracking error, performance (tracking difference) and diversification. Since Nifty 50 is the underlying index for the following analysis, we can ignore the diversification point for now.

Biggest Nifty index funds

Usually, a fund with a huge asset base means that the fund manager will have a higher amount of investors' money to deploy. The value of asset size keeps fluctuating daily. The fund size is influenced by market movements and fund inflows/outflows. A larger asset base could mean that the fund can be in a better position to cut expense ratio. Whether that will happen is a different thing.

The largest Nifty index funds include HDFC Index Fund-NIFTY 50, ICICI Pru Nifty 50 Index Fund, SBI Nifty Index Fund and Franklin India NSE Nifty 50 Index Fund (look at the table below).

Cheapest Nifty index funds

Index funds are not actively managed. Hence, they have a lower expense ratio compared to actively managed funds. While trying to invest in any index fund you think is best, do check the expense ratio. The lower the expense ratio, the better it is. Lower expense (in per cent) means you as an investor will get a higher component of return.

The cheapest Nifty index funds include Navi Nifty 50 Index Fund, UTI Nifty 50 Index Fund, HDFC Index Fund-NIFTY 50 Plan and ICICI Pru Nifty 50 Index Fund (look at the table below).

Nifty index funds with lowest tracking error

Tracking error is a metric which is useful in determining just how efficiently an index fund mimics its underlying index. The lower the tracking error, the closer the index fund follows the benchmark. The higher the tracking error, the more the index fund deviates from the benchmark. Mathematically, tracking error is the annualised standard deviation of the tracking difference of an index fund.

The Nifty index funds with lowest tracking error include Navi Nifty 50 Index Fund, L&T Nifty 50 Index Fund, Kotak Nifty 50 Index Fund and Edelweiss Nifty 50 Index Fund (see table below).

Nifty index fund performance

For those wondering what is the performance of Nifty index funds, here are some key details.

In the last 1, 2, 3, 5, 7 and 10-year period, Nifty 50 has generated a CAGR of -2.32 per cent, 21.8 per cent, 16.7 per cent, 12.87 per cent, 12.62 per cent and 13.17 per cent, respectively. Nifty index funds on a whole have delivered -2.6 to -3.4 per cent in 1 year period, 20.2-21.4 per cent in 2 year period, 15.2-16.3 per cent in 3 year period, 11.3-12.5 per cent in 5 year period, 10.8-12.2 per cent im 7 year period and 11.5-12.7 per cent in 10 year period.

Five funds viz. Tata NIFTY 50 Index Fund, ICICI Pru Nifty 50 Index Fund, HDFC Index Fund-NIFTY 50 Plan, UTI Nifty 50 Index Fund and IDFC Nifty 50 Index Fund consistently figure in the top performing Nifty index fund list across various time periods.