The best index fund is the direct plan of a plain Nifty 50 or Nifty 500 fund with the smallest tracking difference over five years. Not the one with the largest AUM, and not the one at the top of a returns table. Every Nifty 50 index fund holds the same 50 stocks in the same weights. So returns before costs are identical by construction. The only thing that separates them is cost and execution, and that shows up as tracking difference.
We will not publish a ranked leaderboard of individual funds here. We do not hold audited expense ratios or tracking data for every scheme. A table of numbers we cannot verify is worse than no table. What we can do is rank the routes, which is the decision that actually costs people money.
Which index fund route is best?
| Route | What it costs you | Key condition | Who it suits | As of |
|---|---|---|---|---|
| 1. Direct plan, plain index fund | Scheme expense ratio only | Buy from the AMC site or a direct platform | Almost everyone | 31 Aug 2026 |
| 2. ETF on the exchange | Expense ratio plus bid-ask spread and brokerage | Needs a demat account and manual buying | Lump sums, liquid ETFs only | 31 Aug 2026 |
| 3. Index fund of funds | Two layers of expense ratio | Only route to some foreign indices | Nobody, unless the index is otherwise unreachable | 31 Aug 2026 |
| 4. Regular plan, same fund | Expense ratio plus embedded commission | Sold through a distributor | Nobody buying a passive product | 31 Aug 2026 |
| 5. Smart-beta or thematic index fund | Higher expense ratio, concentrated index | You must hold through a bad decade | Investors who already own a broad core | 31 Aug 2026 |
Route 1 wins for the overwhelming majority of readers. Routes 4 and 5 are where the industry makes its money, which is why they are the ones you will be shown.
How many index funds are there in India?
393 index fund schemes exist as direct growth plans, across 30 fund houses. That is from the AMFI daily NAV file, as of 28 August 2026. The Nifty 50 alone is tracked by 39 of them, run by 27 different fund houses.
| Index | Direct growth schemes | Fund houses offering it |
|---|---|---|
| Nifty 50 | 39 | 27 |
| Nifty 500 | 24 | 13 |
| Nifty Midcap 150 and related | 22 | 16 |
| Nifty Next 50 | 21 | 19 |
| Smallcap 250 | 16 | 12 |
| Sensex | 15 | 13 |
| Bank Nifty | 10 | 10 |
Source: AMFI NAVAll file, direct growth plans, as of 28 August 2026. Counts include growth and dividend-variant plan codes, so scheme count is higher than the number of distinct products.
Why tracking difference matters more than the expense ratio
SEBI defines tracking error as the standard deviation of the difference between a fund’s returns and its benchmark’s returns over a period. It measures how consistently a fund follows the index. It does not measure how much you lost to costs.
Tracking difference does. It is the simple gap between the index return and the fund return. Expense ratio is one part of it. The rest comes from cash drag, delayed rebalancing on index reconstitution, and how the fund handles corporate actions and dividends. Two funds can quote the same expense ratio and still deliver a gap of very different sizes.
So read the fund’s own factsheet, not a comparison table. Look for the five-year tracking difference against the index total return, not the price return. Total return includes dividends. Comparing against a price return index flatters every fund on the market.
How do I choose between 27 Nifty 50 funds?
In this order:
- Direct plan. Always. A regular plan of the same scheme holds identical stocks and pays a distributor out of your return.
- Lowest five-year tracking difference from the factsheet. One year is noise.
- Then the expense ratio, as a tie-breaker.
- Then fund size, only to avoid the very smallest schemes, where a single large redemption forces trading at bad prices.
Do not choose on the one-year return. Two Nifty 50 funds with a one-year gap of 0.3% have told you nothing about the next ten years. Do not choose on a star rating either. Rating a passive fund on returns is rating it on the index, which it did not pick.
Which index should you actually track?
The Nifty 50 is the default and it is a reasonable one. It is also concentrated. A handful of financials and one energy conglomerate drive a large share of it. The index is capitalisation-weighted. A stock that has already risen gets a larger weight.
The Nifty 500 fixes concentration at the cost of holding several hundred small companies you will never look at. That is the point of indexing, so it is not really a cost. For a single-fund core holding, a broad market index fund is the more defensible choice than the Nifty 50.
Midcap and smallcap index funds are a different product. Passive investing works cleanly in large caps because the index is liquid and cheap to replicate. In small caps, impact costs on rebalancing are real, and active managers have historically had more room. If you want that exposure, read our note on small cap funds before assuming the passive route is automatically cheaper.
What index funds cost you in tax
An equity index fund is taxed as an equity mutual fund. Units held over 12 months are long term. Long-term capital gains are taxed at 12.5% on the amount above ₹1,25,000 in a financial year. Below 12 months, gains are short term and taxed at 20%. There is no indexation benefit. These figures are as of 17 August 2026.
This makes switching between index funds expensive. Say one Nifty 50 fund looks 0.05% cheaper than yours. Once you pay tax on the exit, that switch is usually a losing trade. Choose carefully once. Then leave it alone. Our page on mutual fund taxation covers the exit-load and holding-period detail.
The uncomfortable part
An index fund guarantees you the index return minus costs. It also guarantees you every drawdown the index takes, in full, with nobody to blame. Indian equity indices have had multi-year flat stretches. Most people who abandon index investing do so in one of those stretches, and they sell after the fall, not before it.
If you cannot hold through a 40% drop without acting, a lower expense ratio will not save you. Set a monthly amount you can sustain, automate it with a SIP calculator to size it honestly, and stop checking. That decision is worth more than any fund choice on this page.
Frequently asked questions
Is an index fund better than an actively managed fund?
For large-cap exposure, the passive route is the safer default. The active manager must beat the index by more than the fee gap, every year. The funds that do it change from decade to decade. In mid and small caps the case is weaker, because the index itself is harder and costlier to replicate. Compare the two on our mutual funds page.
Should I buy an index fund or an ETF?
An index fund, unless you are investing a large lump sum and the ETF is genuinely liquid. An ETF looks cheaper on the expense ratio. Then you pay the bid-ask spread on the way in and the way out, plus brokerage. On thin ETFs you may also trade at a premium or discount to the underlying value. A fund house transacts at NAV. For a monthly SIP, the index fund wins on both cost and effort.
How much should I invest in an index fund each month?
Whatever amount you can keep paying through a bad year. That is the only real constraint. Most schemes accept a small monthly minimum, so the limit is your budget, not the fund. Fix the amount against your income, not against recent returns.
Do index funds pay dividends?
Growth plans do not. Dividends from the underlying stocks are reinvested into the fund and show up in the NAV. That is the plan you want. Dividend or payout plans hand you cash that is taxed at your slab rate and break the compounding you bought the fund for.
Can an index fund lose money?
Yes, and it will, repeatedly. It holds the index in full, so it takes every fall the index takes. There is no downside protection in a passive fund. Anyone telling you otherwise is selling something else.
Sources
- AMFI daily NAV file, direct growth plans, as of 28 August 2026. Scheme and fund-house counts are our own tabulation of that file. portal.amfiindia.com
- SEBI Investor Education, definition and calculation of tracking error. investor.sebi.gov.in
- Credsir capital gains dataset, as of 17 August 2026, for equity mutual fund taxation.
We have deliberately not published expense ratios or tracking-error figures for named schemes. Those change without notice and we could not verify them against a primary source at the time of writing. Take them from the fund’s own factsheet on the AMC website.
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