5 Best Performing Index Funds

Index Funds

An index fund is a type of mutual fund with a portfolio constructed to match and track the components of a financial market index. Index funds follow their benchmark index regardless of the state of the markets.

For example, the Nifty 50 index fund consists of stocks from the Nifty 50 with the same asset allocation. Index funds try to replicate the market index, and it doesn’t try to beat the benchmark’s returns. Due to the nature of replicating the market, the index funds are called passively managed funds.

The advantages and disadvantages of investing in Index funds:

Low Charges and high potential to build long-term wealth

As index funds management does not need an experienced team as they are just replicating the market. The charges of Index funds are very low at the rates starting from almost 0.05% Per annum with the potential to build long-term wealth.

Automated stock picking and asset allocation lead to less intervention of fund managers.

As the benchmark itself has an automated allocation and stock picking methodology based on liquidity and market capitalization, index funds also follow the same process in allocating the portfolio, thus leading to no bias in industry or stock picking.

Broad market exposure leads to low asset allocation

As an investor in an index fund, you will get very broad market exposure. This is both advantageous and disadvantageous as well.

While the advantage comes with exposure to all the top stocks, the disadvantage comes with asset allocation. If the low-allocated stocks perform very well, we will not be able to capture the complete returns generated by that stock.

Low Turnover ratio leading to reduced LTCG or STCG passed on to NAV

As stocks in most of the index funds are rebalanced only for six months once. The turnover ratio of the index fund is meager. This helps in reduced taxation in the form of LTCG and STCG passed on to NAV.

Easier to manage

As the fund manager just needs to rebalance the portfolio and replicate the index every six months. The index fund manager’s primary task lies in replicating the portfolio of the index correctly.

The efficiency of the index fund is measured by “Tracking Error.”

The above advantages don’t shield the index funds from market volatility

Though having the above benefits, It doesn’t mean that. Index funds are free from market volatility. During the downturn of the markets, the index funds are also comprised of equities. The risks that arise with market volatility are always associated with index funds.

Taxation

The taxation of the index funds is similar to that of any equity mutual fund. Short-term Capital gains (STCG) of 15% are charged if redeemed before one year of investment, and Long-Term Capital gains (LTCG) of 10% are applicable if the investment is redeemed after one year of the investment.

What are the index funds you should invest in?

As per our review, we find the below funds will perform well in the future.

1. HDFC Index Nifty 50

2. SBI Nifty Index Fund

3. ICICI Prudential Nifty Next 50 Fund

4. HDFC Index Sensex Fund

5. Edelweiss Large & Midcap Index Fund

Detailed fund performance is as follows:

As per the above comparison, though the large Cap funds should be a part of your portfolio, we would prefer you to choose an index fund. This can help you achieve exposure to large companies and reduce the overall cost of your portfolio.

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