You cannot beat the market consistently. Research proves this.
According to SEBI and AMFI reports, over 70% of active large-cap mutual funds in India failed to outperform their benchmark indices over the past three years. This pattern repeats globally and across time periods.
Index funds accept this reality. Instead of trying to outsmart the market, they simply mirror it. The result? Lower costs, consistent returns, and fewer surprises.
At Belong, we see NRIs increasingly choosing passive investing. With busy lives abroad, who has time to monitor fund managers? Index funds offer a hands-off approach that works.
What Exactly is an Index Fund?
An index fund is a mutual fund designed to replicate a specific market index. If you invest in a Nifty 50 Index Fund, your money buys the same 50 stocks in the same proportions as the Nifty 50 index.
When HDFC Bank makes up 9% of the Nifty 50, the index fund also allocates 9% to HDFC Bank.
No research teams. No stock selection. No guessing. Just systematic replication.
Key characteristics:
- Passive management (no active stock picking)
- Low expense ratios (typically 0.1% to 0.3%)
- Returns mirror the benchmark index
- Lower tracking error indicates better performance
👉 Tip: Index funds work best when held for 5+ years. Short-term market fluctuations matter less over longer periods.
Why Index Funds Make Sense for NRIs
Reason 1: Lower Costs Compound Over Time
Active fund expense ratios typically range from 1% to 2%. Index funds charge 0.1% to 0.3%.
This difference seems small, but watch what happens over 20 years:
Investment | Active Fund (1.5% ER) | Index Fund (0.2% ER) | Difference |
|---|---|---|---|
₹50 Lakhs | ₹2.19 Cr | ₹2.65 Cr | ₹46 Lakhs |
Assuming 12% gross returns
That ₹46 lakh difference comes purely from lower fees. This is money in your pocket, not the fund manager's.
Reason 2: No Fund Manager Risk
Active funds depend on the fund manager's skill. If they leave, retire, or lose their edge, your returns suffer.
Index funds have no such dependency. The index determines everything. Fund managers simply ensure accurate replication.
Reason 3: Simplicity for Busy NRIs
You live abroad with limited time to track Indian markets. Index funds require minimal monitoring. Set up a SIP and forget about it.
Reason 4: Tax Efficiency
Index funds have lower portfolio turnover. Fewer buy-sell transactions mean fewer taxable events. For NRIs subject to TDS on capital gains, this matters.
Types of Index Funds Available in India
Broad Market Index Funds
Nifty 50 Index Funds: Track India's top 50 companies by market capitalization. These blue-chip stocks represent roughly 60% of total market capitalization.
Sensex Index Funds: Track BSE's top 30 companies. More concentrated than Nifty 50, but covers major sectors.
Nifty Next 50 Index Funds: Track companies ranked 51-100 by market cap. These are large-caps with higher growth potential than Nifty 50 constituents.
Nifty 100 Index Funds: Combine Nifty 50 and Nifty Next 50 for broader large-cap exposure.
Mid and Small Cap Index Funds
Nifty Midcap 150 Index Funds: Track companies ranked 101-250 by market cap. Higher growth potential with more volatility.
Nifty Smallcap 250 Index Funds: Track companies ranked 251-500. Highest risk-reward profile.
Sector Index Funds
Track specific sectors like IT (Nifty IT Index), Banking (Nifty Bank Index), Pharma, Infrastructure, and more.
👉 Tip: Start with Nifty 50 or Sensex index funds as your core holding. Add sector or mid-cap exposure only after building this foundation.
Best Nifty 50 Index Funds (December 2025)
Fund Name | Expense Ratio | AUM (₹ Cr) | 5Y CAGR | Tracking Error |
|---|---|---|---|---|
UTI Nifty 50 Index Fund | 0.17% | 26,492 | 15.3% | Low |
HDFC Nifty 50 Index Fund | 0.10% | 18,500 | 15.2% | Low |
ICICI Prudential Nifty 50 Index Fund | 0.18% | 12,300 | 15.1% | Low |
SBI Nifty Index Fund | 0.18% | 8,500 | 15.0% | Low |
Bandhan Nifty 50 Index Fund | 0.10% | 1,527 | 14.4% | Low |
Data as of December 2025. Source: Value Research, INDmoney, Tickertape
UTI Nifty 50 Index Fund
This is India's oldest and one of the largest Nifty 50 index funds. With AUM exceeding ₹26,000 crore, it offers:
- Strong liquidity and lower tracking error
- Consistent benchmark replication over 20+ years
- Managed by experienced passive fund team
The large AUM ensures the fund can handle significant inflows and outflows without affecting performance. This matters when you need to redeem during emergencies.
HDFC Nifty 50 Index Fund
HDFC offers one of the lowest expense ratios at 0.10% (Direct plan). Key features:
- Lowest cost option among established fund houses
- Part of HDFC AMC, India's largest asset manager
- Strong infrastructure for efficient index tracking
For cost-conscious investors, HDFC provides excellent value.
ICICI Prudential Nifty 50 Index Fund
A reliable choice from one of India's leading AMCs:
- Competitive expense ratio
- Strong track record since inception
- Good for investors already using ICICI products
Best Sensex Index Funds (December 2025)
Fund Name | Expense Ratio | AUM (₹ Cr) | 5Y CAGR | Tracking Error |
|---|---|---|---|---|
HDFC BSE Sensex Index Fund | 0.20% | 9,201 | 13.8% | Low |
ICICI Prudential BSE Sensex Index Fund | 0.27% | 954 | 12.9% | Low |
Nippon India Index S\&P BSE Sensex | 0.15% | 754 | 13.1% | Low |
Data as of December 2025. Source: INDmoney, Groww
Nifty 50 vs Sensex: Which to Choose?
Nifty 50 offers broader diversification (50 stocks vs 30). Historically, both deliver similar returns. Choose Nifty 50 for diversification, Sensex if you prefer the BSE ecosystem.
For most NRIs, Nifty 50 index funds are the better choice due to wider stock coverage.
Best Nifty Next 50 Index Funds (December 2025)
Nifty Next 50 tracks companies ranked 51-100. These are tomorrow's Nifty 50 companies. Higher growth potential, slightly more volatility.
Fund Name | Expense Ratio | AUM (₹ Cr) | 5Y CAGR | Notes |
|---|---|---|---|---|
UTI Nifty Next 50 Index Fund | 0.34% | 5,953 | 17.0% | Largest fund |
ICICI Prudential Nifty Next 50 Index Fund | 0.31% | 3,200 | 16.8% | Good liquidity |
DSP Nifty Next 50 Index Fund | 0.30% | 1,100 | 16.7% | Lower AUM |
Navi Nifty Next 50 Index Fund | 0.16% | 1,034 | 16.5% | Lowest cost |
Data as of December 2025. Source: Value Research
Why Consider Nifty Next 50?
According to DSP Mutual Fund, these companies represent high-growth potential with reasonable valuations. Many companies in today's Nifty 50 were once in Nifty Next 50.
The index gets rebalanced semi-annually. Strong performers move up to Nifty 50; weak ones drop out. This built-in quality filter keeps the index fresh.
👉 Tip: Consider allocating 60-70% to Nifty 50 and 30-40% to Nifty Next 50 for a balanced large-cap portfolio.
Best Midcap Index Funds (December 2025)
Fund Name | Expense Ratio | AUM (₹ Cr) | 3Y CAGR | Risk Level |
|---|---|---|---|---|
Nippon India Nifty Midcap 150 Index Fund | 0.30% | 2,031 | 16.4% | Very High |
HDFC Nifty Midcap 150 Index Fund | 0.30% | 1,800 | 16.3% | Very High |
Motilal Oswal Nifty Midcap 150 Index Fund | 0.30% | 1,380 | 16.5% | Very High |
Data as of December 2025. Source: Groww, Value Research
Midcap index funds carry higher volatility. The Nifty Midcap 150 Index represents companies ranked 101-250 by market cap.
Who Should Invest:
- Investors with 7+ year horizons
- Those comfortable with 25-30% drawdowns during corrections
- NRIs seeking growth beyond large-caps
Compare these passive options with actively managed mid-cap funds before deciding. Active managers have historically added value in the mid-cap space.
How to Select the Best Index Fund
Factor 1: Tracking Error
Tracking error measures how closely the fund follows its benchmark. Lower is better.
Tracking Error | Quality |
|---|---|
Below 0.05% | Excellent |
0.05% - 0.10% | Good |
0.10% - 0.20% | Acceptable |
Above 0.20% | Concerning |
According to Cafemutual, 11 index funds now have tracking errors below 0.05%, showing how efficient passive management has become in India.
Factor 2: Expense Ratio
Even among index funds, expense ratios vary. A 0.10% difference compounded over 20 years adds up significantly.
Compare Direct plan expense ratios. Regular plans add distributor commissions, increasing costs unnecessarily for informed investors.
Factor 3: AUM Size
Larger AUM generally indicates:
- Better liquidity
- Lower tracking error
- More efficient operations
Avoid very small index funds (AUM below ₹200 crore) as they may face liquidity issues.
Factor 4: Fund House Reputation
Stick with established AMCs for index funds. They have:
- Better systems for index replication
- Lower operational errors
- Stronger regulatory compliance
UTI, HDFC, ICICI, SBI, and Nippon are reliable choices.
Index Funds vs ETFs: What's Better for NRIs?
Both track the same indices. The difference lies in how you buy and sell.
Feature | Index Fund | ETF |
|---|---|---|
Trading | Buy/sell at NAV once daily | Trade anytime on exchange |
Account Needed | Mutual fund account | Demat + trading account |
SIP Available | Yes, fully automated | Limited automation |
Expense Ratio | 0.10% - 0.30% | 0.02% - 0.10% |
Minimum Investment | ₹500 - ₹1,000 | Price of 1 unit |
Liquidity Risk | None (AMC redemption) | Depends on trading volume |
For NRIs, Index Funds are Usually Better Because:
- Simpler SIP: True automated investing without market timing
- No Demat Required: Less paperwork for overseas investors
- Guaranteed Liquidity: Redemption at NAV regardless of market volume
- Fractional Units: Invest exact amounts via SIP
According to PL Capital, index funds are superior for systematic wealth creation through monthly savings.
ETFs make sense only if you:
- Have large lump sums to deploy
- Want intraday trading flexibility
- Already maintain an active demat account
👉 Tip: Don't invest in US-listed India ETFs like INDA or INDY. According to GoINRI, these have expense ratios of 0.89% and significant tracking errors. Invest directly in Indian index funds instead.
Building an Index Fund Portfolio for NRIs
Conservative Portfolio (Lower Risk)
Fund | Allocation | Purpose |
|---|---|---|
Nifty 50 Index Fund | 60% | Core large-cap exposure |
Sensex Index Fund | 20% | Complementary large-cap |
Liquid Fund | 20% | Emergency buffer |
Expected returns: 10-12% CAGR over 10 years
Balanced Portfolio (Moderate Risk)
Fund | Allocation | Purpose |
|---|---|---|
Nifty 50 Index Fund | 50% | Core stability |
Nifty Next 50 Index Fund | 30% | Growth potential |
Liquid Fund | 20% | Rebalancing buffer |
Expected returns: 12-14% CAGR over 10 years
Aggressive Portfolio (Higher Risk)
Fund | Allocation | Purpose |
|---|---|---|
Nifty 50 Index Fund | 40% | Foundation |
Nifty Next 50 Index Fund | 30% | Growth engine |
Nifty Midcap 150 Index Fund | 20% | High growth |
Liquid Fund | 10% | Rebalancing |
Expected returns: 14-16% CAGR over 10 years
For NRIs considering returning to India, explore how GIFT City investments can complement your portfolio with tax-efficient options.
Index Funds vs Active Funds: The Data
According to Echoloom and Morningstar India, here's how they compare in 2025:
Nifty 50 Index Funds: Average 1-year return of 14-16% Active Large-Cap Funds: Average 1-year return of 12-15% with higher volatility
The data shows index funds have outperformed most active large-cap funds after accounting for fees and consistency.
Where Active Funds Still Win:
- Mid-cap and small-cap categories
- Flexi-cap where managers can shift allocations
- Specialized themes requiring research
PrimeInvestor's analysis confirms that active funds struggle most in the large-cap space. The largest 50 companies are so well-researched that finding mispriced stocks is nearly impossible.
👉 Tip: Use index funds for large-cap exposure. Consider active funds for mid-cap and flexi-cap allocations where stock selection adds value.
NRI-Specific Considerations
FATCA Compliance
US and Canada NRIs face restrictions with some AMCs due to FATCA regulations. Most large index fund providers accept NRI investments, but verify before investing.
AMCs Accepting US/Canada NRIs:
- UTI Mutual Fund
- SBI Mutual Fund
- Nippon India Mutual Fund
Investment Route
NRIs can invest in index funds through:
- NRE Account: Fully repatriable, tax-free interest
- NRO Account: Restricted repatriation, taxable interest
For best NRI accounts, compare features across major banks.
Taxation
Index funds are taxed as equity mutual funds:
Holding Period | Tax Rate |
|---|---|
Less than 12 months (STCG) | 20% |
More than 12 months (LTCG) | 12.5% on gains above ₹1.25 lakh |
TDS applies at source for NRIs. Use DTAA benefits to potentially reduce tax liability.
KYC Requirements
Complete NRI KYC with any mutual fund platform. You'll need:
- Passport copy
- Overseas address proof
- NRE/NRO bank account details
- PAN card
Check our guide on mutual fund KYC for NRIs.
Common Index Fund Mistakes to Avoid
Mistake 1: Chasing Sector Index Funds
Nifty IT Index, Nifty Bank Index, and similar sector funds seem attractive after strong rallies. But sector concentration increases risk without the diversification benefits of broad market indices.
Solution: Stick to broad market indices (Nifty 50, Nifty Next 50) as core holdings.
Mistake 2: Ignoring Tracking Error
Not all Nifty 50 index funds perform equally. Tracking error variations mean some funds consistently underperform their benchmark.
Solution: Check tracking error before investing. Choose funds with tracking error below 0.10%.
Mistake 3: Timing the Market
Index funds work through consistent investing, not timing. Waiting for "the right moment" often means missing returns.
Solution: Set up monthly SIPs and invest regardless of market conditions.
Mistake 4: Over-diversifying with Index Funds
Holding 5 different Nifty 50 index funds doesn't add diversification. They all hold the same stocks.
Solution: One Nifty 50 index fund is enough. Add Nifty Next 50 or Midcap 150 for genuine diversification.
Mistake 5: Expecting Index Funds to Beat the Market
Index funds match the market, not beat it. After expenses, they slightly underperform the index.
Solution: Set realistic expectations. Consistent market returns at low cost is the goal.
When Index Funds Might Not Be Right
Index funds aren't perfect for every situation:
You Want Downside Protection: Index funds fall with the market. Balanced advantage funds offer built-in risk management.
You Prefer Guaranteed Returns: Consider GIFT City fixed deposits for principal protection with tax benefits.
You Have Short Time Horizons: For goals under 3 years, equity index funds carry too much volatility.
You Want Sector Exposure: Active sectoral funds may capture opportunities better than sector indices.
Compare your options using Belong's NRI FD Comparison Tool or explore GIFT City mutual funds for alternatives.
How to Start Investing in Index Funds
Step 1: Complete NRI KYC with your chosen platform
Step 2: Link your NRE or NRO bank account
Step 3: Select an index fund based on the factors discussed
Step 4: Set up a monthly SIP (recommended) or invest lump sum
Step 5: Review annually but avoid frequent changes
Most platforms allow investments from ₹500 monthly. Start small if needed, but start.
Conclusion: Simplicity Wins
Index funds offer NRIs exactly what they need: low-cost, diversified exposure to India's growth story without the complexity of active fund selection.
The data supports passive investing. Lower costs compound into significant wealth over time. Consistent benchmark returns beat most active fund managers.
Key takeaways:
- UTI Nifty 50 and HDFC Nifty 50 lead the large-cap index fund space
- Expense ratios of 0.10-0.20% are now standard
- Index funds beat 70%+ of active large-cap funds
- Choose index funds for large-cap, consider active for mid/small-cap
- Long-term SIPs work better than timing attempts
Your next step:
Join Belong's WhatsApp community to discuss investment strategies with other NRIs. Or download the Belong app to explore how GIFT City investments can complement your passive portfolio with tax-free returns.
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