Best Index Funds & ETFs in India (2025): Beginner’s Guide to Passive Investing
Index funds and ETFs are the easiest way for beginners to invest in the stock market without picking individual stocks. In India, passive investing is booming in 2025 as investors seek low-cost, diversified, and stress-free wealth building. This ultra-evergreen guide compares the top options, explains how they work, and helps you choose the best fit for your goals.
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1) What Are Index Funds & ETFs?
Index Funds are mutual funds that track a specific index such as the Nifty 50, Sensex, or Nifty Next 50. The fund manager does not pick stocks; instead, the fund simply mirrors the index composition. ETFs (Exchange Traded Funds) also track indexes but are listed on exchanges like NSE and BSE, and trade just like shares. Both are designed to provide broad market exposure with low costs.
For example, if you buy one unit of a Nifty 50 index fund, you essentially invest in India’s top 50 companies across multiple sectors. If you buy SBI ETF Nifty 50, you own a slice of those companies but in the form of an exchange-traded security. Both methods give you instant diversification with a single click.
2) Why Passive Investing Works
Passive investing has gained momentum globally because it eliminates the need for constant stock picking. In India, most actively managed equity funds fail to consistently beat their benchmark over a 10-year horizon. According to SPIVA India reports, nearly 80% of active large-cap funds underperform the Nifty 50 in the long run. Passive funds simply follow the index at a fraction of the cost.
- Low Cost: Index funds have expense ratios as low as 0.05%, compared to 1–2% for active funds.
- Diversification: A single purchase gives you exposure to 50–500 companies.
- Transparency: You always know what the fund holds — the same as the index.
- Performance: Historical data shows passive funds match or beat most active funds.
- Discipline: Ideal for SIPs; removes emotions and guesswork from investing.
3) Top Index Funds in India 2025
| Fund Name | Index Tracked | Expense Ratio | 5Y CAGR |
|---|---|---|---|
| SBI Nifty Index Fund | Nifty 50 | 0.15% | 12.6% |
| HDFC Index Fund – Nifty 50 Plan | Nifty 50 | 0.20% | 12.5% |
| ICICI Prudential Nifty Next 50 Fund | Nifty Next 50 | 0.25% | 15.2% |
| Nippon India Sensex Index Fund | S&P BSE Sensex | 0.18% | 12.9% |
| UTI Nifty 500 Index Fund | Nifty 500 | 0.25% | 13.5% |
Analysis: SBI and HDFC Nifty funds are excellent low-cost core holdings. ICICI’s Nifty Next 50 is riskier but offers higher growth. UTI’s Nifty 500 provides exposure to the entire market.
4) Best ETFs in India 2025
| ETF Name | Exchange | Expense Ratio | 5Y CAGR |
|---|---|---|---|
| Nippon India ETF Nifty BeES | NSE/BSE | 0.05% | 12.4% |
| SBI ETF Nifty 50 | NSE/BSE | 0.07% | 12.5% |
| ICICI Prudential Next 50 ETF | NSE/BSE | 0.12% | 14.8% |
| HDFC Sensex ETF | NSE/BSE | 0.10% | 13.0% |
| Nippon India GoldBeES | NSE/BSE | 0.20% | 11.2% |
Analysis: Nifty BeES and SBI ETF Nifty 50 are highly liquid, making them beginner-friendly. ICICI Next 50 ETF is growth-oriented. GoldBeES diversifies with gold exposure, helpful during market corrections.
5) Index Funds vs ETFs
Index funds and ETFs share a common foundation but differ in execution. Index funds are suitable for SIP investors who prefer convenience without needing a Demat account. ETFs, however, require a Demat + trading account but offer intraday liquidity like stocks.
- Accessibility: Index funds via AMC apps; ETFs via stockbroker.
- Costs: ETFs are slightly cheaper, but index funds support SIPs.
- Liquidity: ETFs can be traded intraday, index funds transact at NAV.
- Minimum Investment: Index funds from ₹500; ETFs one unit (₹200–₹300).
6) Index Funds vs Active Funds
Active funds employ fund managers who try to beat the index. While this sounds appealing, data shows otherwise. Over the past decade, most Indian large-cap active funds underperformed the Nifty 50. In contrast, index funds matched the index at minimal cost. Active funds charge higher expense ratios (1.5%+), eroding returns over time. Index funds, with lower costs and transparency, are a superior option for beginners who want predictable performance.
7) Costs & Taxes
While index funds and ETFs are cost-efficient, understanding taxation is crucial. Expense ratios range from 0.05% to 0.25%, much lower than active funds (1.5–2%). ETFs incur brokerage + Demat charges, while index funds do not.
Taxation Example: If you invest ₹1,00,000 in an index fund and it grows to ₹1,50,000 after 3 years, you make a gain of ₹50,000. Since this is long-term capital gain (holding > 1 year), the first ₹1,00,000 is tax-free annually and the remaining is taxed at 10%.
Short-term gains (< 1 year) are taxed at 15%. Dividends are added to your income slab. SIPs in index funds get the same taxation as lump sum, calculated per unit basis.
8) Case Study: ₹10,000 Investment
Let’s compare two scenarios:
- Lumpsum: ₹10,000 invested in Nifty 50 in 2015 would be worth ~₹32,000 in 2025 (CAGR ~12.5%).
- SIP: ₹5,000 monthly SIP in Nifty 50 from 2015–2025 would be worth ~₹11.5 lakh (invested ₹6 lakh). SIP beats lumpsum because of rupee-cost averaging.
This demonstrates the power of consistency. Passive investing works best when you hold long-term and keep adding regularly.
9) International ETFs for Indians
Indian investors can diversify globally via international ETFs available on NSE/BSE. These track US and global markets, helping hedge against domestic volatility.
- Nippon India Nasdaq 100 ETF: Gives exposure to US tech giants (Apple, Amazon, Microsoft, Tesla).
- Motilal Oswal S&P 500 ETF: Tracks the top 500 US companies, offering global diversification.
- ICICI Prudential Global ETF: Provides a mix of developed market equities.
Adding 5–10% of your portfolio to international ETFs is recommended for diversification.
10) Mistakes Beginners Make
- Chasing last year’s best-performing fund instead of focusing on long-term consistency.
- Stopping SIPs during market corrections, losing out on compounding opportunities.
- Over-diversifying with too many funds tracking the same index.
- Confusing ETFs with stocks and over-trading them.
- Ignoring expense ratio and tracking error while selecting funds.
11) 30-Day Passive Investing Strategy
Week 1: Learn basics, shortlist 2–3 index funds or ETFs. Compare expense ratio and tracking error.
Week 2: Open a Demat account (for ETFs) or MF account (for index funds). Use trusted brokers like Angel One, Zerodha, Groww.
Week 3: Start SIP with ₹1000–₹5000. Automate investments via ECS/UPI. Avoid timing the market.
Week 4: Review progress. Set a long-term horizon (5–10 years). Ignore daily volatility and focus on compounding.
12) FAQs
1) Which is better: Index Funds or ETFs?
Index funds are simpler (no Demat), ETFs are cheaper but require Demat. For SIP, choose index funds. For traders, ETFs work better.
2) Are ETFs safe in India?
Yes. ETFs are regulated by SEBI, listed on NSE/BSE, and backed by reputed AMCs. Liquidity is key — choose high AUM ETFs.
3) Minimum investment?
Index funds: ₹500 via SIP. ETFs: 1 unit (~₹200–₹300). Both are beginner-friendly.
4) Nifty 50 vs Sensex?
Nifty 50 has 50 companies across more sectors, Sensex has 30 large caps. Both are benchmarks; Nifty is more diversified.
5) What is tracking error?
Tracking error is the deviation between fund return and index return. Lower is better; SBI & HDFC funds maintain low error.
6) Do I need Demat for index funds?
No. Index funds can be bought via MF apps. Only ETFs require Demat + trading account.
7) Which is best for SIP?
Index funds are best for SIPs because they support automated monthly investments. ETFs don’t offer SIP features.
8) Can I invest in US ETFs from India?
Yes. Nasdaq 100, S&P 500 ETFs listed in India provide exposure to US markets. Limit allocation to 10–15% of portfolio.
9) Do index funds offer tax benefits?
No. Index funds/ETFs don’t qualify under 80C. For tax-saving, consider ELSS funds separately.
10) Should I replace all active funds with index funds?
No. A mix works well. Use index funds for core allocation and active funds for niche strategies like midcaps or thematic sectors.
11) Are index funds risky?
They carry market risk but less than individual stocks. Since they track broad indexes, the risk is diversified.
12) Can I stop SIP anytime?
Yes. SIPs in index funds can be paused/stopped anytime without penalty.
13) How long should I stay invested?
At least 5–7 years. Longer horizon ensures compounding and smooths out volatility.
14) Are index funds good for beginners?
Absolutely. They are low-cost, transparent, and ideal for building wealth slowly and steadily.
15) What is the best index fund in 2025?
SBI Nifty Index Fund and Nippon Nifty BeES ETF are highly recommended due to low cost and strong liquidity.
13) Related Posts
- Day 5: Top 10 Investor Mistakes
- Day 6: How to Open a Demat Account
- Day 7: How to Choose the Right Broker
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