What are index funds?

Index funds are passive investment instruments that track a certain index and seek to produce returns that are comparable to those of the index they are tracking. In other words, index funds are mutual funds that invest in a set of stocks or asset classes that imitate the portfolio of a market index. Investors who want to invest in mutual funds through passive investing can look at index funds.

What is an index?
An index is actually a group of stocks defining a market segment. The index can be thematic, based on market capitalisation, or geographic specific in nature. To give an example, if an index fund tracks a benchmark like BSE Sensex 30, the fund manager of the scheme would invest in the stocks in the same proportion as the index. The fund manager's task is to monitor the index and re-balance the mutual fund portfolio according to the underlying index.

What about the returns?
The returns of the index fund however, will not always reflect the index returns due to the 'tracking error'. Learn more about tracking error.

While choosing the index funds, investors should look at the expense ratio and tracking error. The lower the expense ratio and tracking error of the mutual fund scheme, the better it is for the investor.

Minimum investment
The minimum investment in various index funds starts from Rs 500. But there are schemes in the industry, where the minimum investment amount is as low as Rs 100.

Now that you understand the concept of index funds, take a look at the top funds hand-picked by our team of analysts.

Suggested read: ETFs or index funds: Which should you choose?