Index Fund: A Mutual Fund That Copies an Index, Not a Manager

An index fund is an open ended mutual fund that holds the same securities, in the same weights, as a chosen market index, such as the Nifty 50, so that its returns and risk stay close to that index instead of depending on a manager's views.

For investors asking what is an index fund, AMFI describes it as a portfolio that mirrors a market index, with same securities and the same weights. The fund manager does not rebalance the holdings on market views and makes only minor periodic adjustments. As a result, the returns and risk of the fund stay close to those of the index.

The 95% rule and tracking error

SEBI's categorisation of October 2017 places index funds in the "Other Schemes" group, as open ended schemes that follow an index. Such a fund must keep at least 95% of its total assets in the securities of the index it tracks.

One fund house can run several index funds on different indices, such as the Nifty 50 and the Nifty Next 50.

For an individual investing Rs 10,000 in a fund tracking an index that gains 10% in a year, the value will be near Rs 11,000, less a small gap for costs and tracking.

Index fund vs ETF

Investors in these funds can see what the fund holds and how closely it follows its index, as the fund houses publish this information. AMFI publishes the number of index fund schemes and their assets every month.

Passive does not mean free of risk, as the returns of the fund will also fall when the index falls.

An index fund is often confused with an exchange traded fund (ETF). Both are passive, both fall under the same SEBI group, and the passive-fund totals reported by AMFI count the two together. However, an index fund is bought and redeemed with the fund house at the NAV, the price per unit, whereas an ETF trades on the stock exchange.