Index Mutual Funds - Best Index Funds to Invest in 2024

Index Mutual Funds have gained significant popularity in recent years, attracting investors with their low costs, diversified portfolios and potential for long-term growth. These passively managed funds track the performance of a specific stock market index, such as the NIFTY 50 mutual funds or the S&P BSE Sensex, aiming to replicate its returns.

Investors must understand the dynamics of Index Mutual Funds and how they can integrate these instruments into their portfolios. This blog offers a detailed overview of Index Funds, highlighting their key features and benefits, providing valuable tips for investing in them and the list of the best Index Mutual Funds.

What are Index Mutual Funds?

Index Funds are a type of passively managed Mutual Fund that tracks and replicates the performance of a specific market index, such as the S&P 500 or the Nifty 50 Mutual Funds. Unlike actively managed funds, where fund managers actively select and invest in stocks, Index Funds simply hold all the stocks in the chosen index in the same proportion as the index itself. This passive approach results in several advantages for investors.

Advantages of Index Mutual Funds

Low Costs

They have very low expense ratios, which are the annual fees the fund charges to manage its assets. These low costs are due to the passive nature of Index Funds, as they do not require a team of analysts to research and select stocks.

Diversified Portfolios

Offer instant diversification across multiple market sectors. By holding many stocks, Index Funds minimise the risk associated with any company underperforming.

Market-Aligned Returns

With an aim to match the market index performance they track, investors can expect to earn returns closely aligned with the overall market performance without the added risk and uncertainty of active management.

Factors to consider before investing in Index Mutual Funds

Here are the factors to consider before you invest in index mutual funds:

Risk tolerance

Always analyse your risk tolerance before investing in index funds. Index funds are market-related funds and volatility may not be suitable for every investor. It is advised to consider these factors before investing.

Financial objectives

Keep an eye on your financial goals and create a long-term strategy detailing the objectives you hope to accomplish with your investment. You can then decide based on your needs whether to make long-term or short-term investments.

Investment frequency

Another major factor to consider is the investment frequency. It refers to the time period you want to invest. Investing in a short-term fund makes sense if your goal is to save money for a car or a house; on the other hand, investing in a long-term fund, like an equity index, makes sense if your goal is to save money for a long-term objective, like retirement.

When should you consider Index Funds?

Index Funds are a suitable investment option for a wide range of investors, including:

Long-term investors

Well-suited for long-term investment horizons, as they provide a consistent and low-cost approach to achieving market aligned returns.

Risk-averse investors

Offer a lower risk level than actively managed funds, as they are not subject to the same degree of stock-specific risks.

Investors seeking diversification

Provide instant diversification across multiple sectors, reducing the impact of any single company's performance on the overall portfolio.

Who should invest in Index Mutual Funds?

Index Mutual Funds are particularly suitable for investors who:

Seek a hands-off approach

Index Mutual Funds require minimal active involvement from investors, making them ideal for those with limited time or expertise in stock selection.

Prefer low-cost investing

Index Funds offer a cost-effective way to gain exposure to the market.

Value diversification

Index  Mutual Funds provide broad diversification, reducing risk and enhancing overall portfolio stability.

Have a long-term investment horizon

Index Funds are best suited for long-term investors who can ride out market fluctuations.

How to Start Investing in Index Funds with ICICI Bank

Before investing in index funds, ensure you have created your account with ICICI Bank using net banking for the iMobile Pay app on your smartphone. Also, make sure you have your KYC done before proceeding with investing.

Here’s how you can start investing in index mutual funds with ICICI Bank:

Using Net Banking

• Log in to your ICICI Bank net banking and go to investment and insurance.

• Next, click on ‘buy mutual funds’.

• Select the top categories in index funds.

• Choose your desired scheme and start investing with the amount you want.

iMobile App

• Download the iMobile Pay app, log in using your credentials, and go to investment and insurance.

• Click on ‘buy mutual funds’.

• Choose from the top categories in index funds.

• Pick your best scheme and invest with the required amount.

Best Practices for investing in Index Mutual Funds

To maximise the benefits of NIFTY 50 Mutual Funds, consider these best practices:

Choose the right index

Select an index that aligns with your investment goals and risk tolerance. Consider factors such as market capitalisation, sector exposure and historical performance.

Invest for the long term

Index Funds are designed for long-term investment horizons. Avoid frequent trading or market timing attempts, as these can erode returns and increase costs.

Consider regular investing

Regular investments, such as through Systematic Investment Plans (SIPs), can help you benefit from pound-cost averaging, where you purchase more units when prices are low and fewer units when prices are high.

Review your portfolio regularly

Review your Index Fund holdings periodically to ensure they align with your investment objectives and risk tolerance.

Top Index Funds to invest in 2024

Here are some of the best Index Mutual Funds NIFTY 50 Mutual Funds  in India based on their five-year performance:

ICICI Prudential Nifty 50 Index Fund 

This fund tracks the NIFTY 50 Index, which comprises the 50 largest and most liquid stocks listed on the National Stock Exchange of India (NSE). The fund aims to replicate the performance of the NIFTY 50 Index by investing in a basket of stocks in the same proportion as they are represented in the index. The fund has a five-year return of 15.49%.

Bandhan Nifty 50 Index Fund

This fund also tracks the NIFTY 50 Index, with the same investment objective as the ICICI Prudential Nifty 50 Index Fund. The fund has a five-year return of 15.64%.

UTI Nifty 50 Index Fund 

Another fund that tracks the NIFTY 50 Index, the UTI Nifty 50 Index Fund aims to provide investors with returns that closely match those of the index. The fund has a five-year return of 15.52%.

HDFC Index Fund Nifty 50 Plan  

Like the others mentioned, this fund tracks the NIFTY 50 Index and seeks to replicate its performance by investing in a basket of index constituents. The fund has a five-year return of 15.45%.

Nippon India Index Nifty 50

The Nippon India Index Nifty 50 Fund tracks the NIFTY 50 Index. It aims to provide investors with returns that closely match the indexes. The fund has a five-year return of 15.45%.

FAQs for Best Index Funds to Invest

What is the ideal amount to invest in index Mutual funds?

The 90/10 rule, suggested by Warren Buffett, advises putting 90% of your money into low-cost stock index funds and 10% into short-term government bonds.

Do Index Mutual Funds pay dividends?

Yes, index funds pay dividends because they must. These dividends come from the earnings of the investments in the fund. The amount, timing, and tax effects depend on the specific fund and your tax situation. Dividends can be paid in cash or reinvested into the fund.

What's the ideal duration for investing in an Index Mutual Fund

Index funds are best for investors planning to invest for 7+ years. Though they may fluctuate in the short term, they tend to stabilise over time. Over at least seven years, you can expect returns of around 10-12%.

Are Index Funds a Smart Choice for New Investors?

Index funds can be a good option for new investors, however they need to keep in mind that these funds are subject to market risks and involve a high risk. But these are said to be a smart way of investing as these offer a diversified portfolio and a healthy exposure to the market with good returns.

Conclusion

Index Mutual Funds offers a simple, cost-effective and diversified approach to investing in the stock market. They are particularly well-suited for long-term investors seeking market-linked returns without active stock selection complexities. While past performance does not guarantee future results, Index Funds have consistently demonstrated their ability to track market performance and provide investors with a sound investment strategy.