Like other mutual fund categories, index funds also witnessed a significant drop in inflows in February. There was a 20.5% drop to Rs 4,177.02 crore in inflows during the month, against Rs 5,254.66 crore in January 2024. This decline in index fund inflows was the result of an overall weak sentiment due to a market downturn.
There were around 298 index funds with over 1.29 crore folios in the mutual fund market, as of February 28, which shows how much importance fund houses give to this mutual fund category.
So, if you are also planning to invest in 2025 and want better returns at a lower cost, then index funds can be a great option. These funds are suitable for relatively risk-averse investors as these funds track a particular market index, making them less prone to equity-linked risks.
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In this article, we have selected the top 5 cheapest index funds, based on their expense ratio. Here are they:
1. Edelweiss Nifty 50 Index Fund – Direct Plan
Expense ratio: 0.05%
Benchmark: NIFTY 50 TRI
2. Navi Nifty 50 Index Fund – Direct Plan
Expense ratio: 0.06%
Benchmark: NIFTY 50 TRI
3. Kotak Nifty 50 Index Fund – Direct Plan
Expense ratio: 0.07%
Benchmark: NIFTY 50 TRI
4. Nippon India Index Fund – Nifty 50 Plan – Direct Plan
Expense ratio: 0.07%
Benchmark: NIFTY 50 TRI
5. Mirae Asset Nifty 50 Index Fund – Direct Plan
Expense ratio: 0.08%
Benchmark: NIFTY 50 TRI
(Data Source: Value Research)
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Great returns despite falling market
The stock market has remained volatile for the last few months. Nifty has given negative returns in the last 6 months. Since reaching its peak in September 2024, the Nifty has fallen by about 14%.
But it is worth noting that despite this short-term volatility in the stock market, these 5 index funds reviewed in the story have given an annualised return of more than 11% in the last 3 years. This comes as a relief for those with a long-time perspective.
Benefits of investing in index funds
The biggest advantage is that the expense (expense ratio) of index funds is very low. Since these funds are not actively run by any fund manager, investors have to pay less fees than active funds. The direct benefit of this is that more money of the investors gets added to their returns, and not deducted in fund management fees.
In the long term, index funds have given 12-15% annual returns despite market volatility. This is ideal for those who want to get growth with the average return of the market without taking much risk.
Another feature of index funds is that they are more transparent. They directly track Nifty 50, Sensex or other major indexes. This means that there is very little chance of manipulation or wrong decisions, which is often seen in active funds.
Apart from this, through index funds, investors can invest easily in 50 to 100 big companies at once. This is a great way of diversification, which reduces the risk.
Risks of investing in index funds
Although index funds are considered a low-risk option, they are completely dependent on market performance. If the market falls, index funds will also fall. Especially, if an investor invests for only 1-2 years, the investment may be vulnerable to market volatility.
Another thing to note is that sometimes some good active mutual funds can perform better than index funds. However, the management fees of such active funds are high, which may reduce their actual returns slightly. Therefore, investors should maintain the right balance between active and index funds.
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For which investors are index funds right?
If you are one of those investors who do not want to take too much risk, then index funds can be a stable and safe option for you. They follow the entire movement of the market, due to which you are likely to get good returns in the long term.
Index funds are also great for busy professionals and new investors. If you cannot constantly monitor the stock market and want a good investment option without doing much research, then index funds can be the best option for you.
What things should be kept in mind before investing in index funds?
If you are investing in index funds, then the best way is to invest through SIP. With this, you can avoid market fluctuations and keep your average purchase price under control.
Before investing, it is important to see what the expense ratio of the fund is in which you are investing. Funds with low expenses in index funds can give better returns, so always give preference to funds with a low expense ratio.
Index funds benefit only when you invest for a long time. If you stay invested for more than 5-10 years, you will get its real benefit.
The most important thing is that one should not panic due to market decline. There are fluctuations in the market in the short term, but in the long term the index grows and gives good returns. So be patient and invest with a long-term perspective.
Summing up
If you want good growth at low cost in 2025, then index funds can prove to be an excellent investment option. In these, investors get good returns in the long term with low risk, diversification, and transparency. However, it is important that you invest with a long-term perspective and don’t get scared by small market dips.
