Index Funds
Understand what index funds are, how passive investing works, their costs, risk and taxation, and how to use them as a low-cost core of your portfolio.
What is an Index Fund?
An index fund is a mutual fund that tracks a market index instead of trying to beat it. The Securities and Exchange Board of India (SEBI) requires an index fund to invest at least 95 percent of its assets in the securities of the index it tracks, so what you see is what you own..
Index Funds at a Glance
Popular Types of Index Funds
Common indices Indian investors track
Nifty 50 index funds
Track India's 50 largest companies. The most common starting point for passive investors.
Broad market index funds
Nifty 500 and Nifty Next 50 funds spread across many more companies for wider coverage.
International index funds
Funds tracking the S&P 500 or Nasdaq 100 add global exposure to your portfolio.
How to Choose an Index Fund
Four checks before you commit money
Pick the index first
Decide which market you want to own: the Nifty 50 for large caps, the Nifty 500 for the broad market, or an international index for global exposure. The index drives your return, not the fund brand.
Compare tracking error
A good index fund hugs its index closely. Lower tracking error means the fund replicates the index more faithfully. Compare tracking error across funds on the same index.
Check the expense ratio
Since funds on the same index hold identical stocks, the cheaper fund usually wins. Always compare the Direct plan expense ratio.
Match it to your goal and horizon
Equity index funds suit medium to long term goals. Confirm the allocation fits your overall plan rather than chasing last year's return.
How Are Index Funds Taxed?
- Most index funds in India track equity indices like the Nifty 50 or Nifty 500, so they follow equity taxation.
If you sell units within 12 months, gains are Short Term Capital Gains (STCG), taxed at 20 percent. - If you hold for more than 12 months, gains are Long Term Capital Gains (LTCG), taxed at 12.5 percent on the amount above Rs 1.25 lakh in a financial year.
Not every index fund is equity. Funds that track international indices such as the S&P 500 or Nasdaq 100, and those tracking debt indices, can be taxed differently. Check the fund's tax category before you invest.
There is no tax while you stay invested. Tax applies only when you redeem or switch. A Systematic Investment Plan (SIP) is treated as a series of separate purchases, so each instalment has its own holding clock. Tax rules can change in a Union Budget, so confirm current rates before you transact, or let NovaAI factor your slab and holding period into the after tax picture.
Explore Mutual Fund & Its Categories
Compare where each category sits on risk and return
Mutual Funds
Start here to compare every equity and debt category in one place and find where to begin.
Large Cap
India's top 100 companies. The lowest volatility equity category and a steady portfolio core.
Mid Cap
Companies ranked 101 to 250. Higher growth than large caps with meaningfully bigger swings.
Small Cap
Companies ranked 251 and beyond. The highest growth potential and the sharpest drawdowns.
Flexi Cap
One fund that moves freely across large, mid, and small caps as the manager sees opportunity.
Liquid Funds
Low risk debt funds for parking short term money you may need within days or weeks.
Related Calculators & Research
Model returns, check overlap, and plan your investments before you commit
SIP Calculator
Project how a monthly index fund investment could grow over your horizon.
Lumpsum Calculator
Estimate the future value of a one-time index fund investment.
CAGR Calculator
Compute the annualised return of an index or fund over any period.
Portfolio Overlap Calculator
Spot duplicate stocks between your index funds and active funds.
Fund Category Explorer
Browse and compare index funds side by side.
Asset Performance Dashboard
Compare 10 years of Nifty, Gold, and Nasdaq returns and see why no single asset wins every year.
See Where Index Funds Fit in Your Portfolio
ovelty Wealth does more than explain index funds—it helps you optimize them. Connect your portfolio, and NovaAI will evaluate your asset mix, flag fund overlap, and ensure your allocation aligns with your goals.
Index Funds: Frequently Asked Questions
An index fund is a mutual fund that tracks a market index, such as the Nifty 50. There is no active stock picking, so costs are low and returns closely mirror the index. This is known as passive investing.
It depends on your view. Index funds deliver the market return minus a small cost, while active funds try to beat the market but often do not, especially in large caps.
There is no single best index fund for everyone. On the same index, funds hold near-identical stocks, so the ones with lower tracking error and a lower expense ratio usually stand out. Compare options in the Fund Category Explorer.
Most index funds track equity indices and are taxed as equity: 20 percent on gains held under 12 months (STCG) and 12.5 percent above Rs 1.25 lakh on gains held longer (LTCG). International and debt index funds can be taxed differently. Verify current rules before transacting.