Skip to content

Demo environment. Sample data and demo handoffs only — no real accounts or transactions.

GlossaryMutual funds

Index fund

A mutual fund that aims to replicate a market index by holding the index’s constituents in the same proportions, at low cost.

An index fund does not try to pick winners. It holds the securities in a chosen index, in the same weights, and aims to deliver the index’s return minus costs. When a company enters or leaves the index, the fund adjusts. This approach is called passive investing.

Why it matters

Index funds tend to have low expense ratios, high transparency — you know what they hold — and no reliance on a fund manager’s stock selection. For core, long-term holdings, many investors use them to capture market returns at low cost.

How to read it

  • Pick the index first. A large-cap index fund and a small-cap or sector index fund carry very different risks. A fund is only as diversified as its index.
  • Check tracking error and tracking difference — how closely the fund has actually followed its index after costs.
  • Compare costs among funds on the same index. Their portfolios are near-identical, so expense ratio and tracking quality are the main differences.

Common misconceptions

  • “Index funds are low risk.” They carry the full market risk of their index. If the index falls 30%, the fund falls about the same.
  • “All index funds on one index are identical.” Costs, tracking quality and fund size can differ.
  • “An index fund and an ETF are the same thing.” Both can track one index, but an ETF trades on an exchange through the day, while an index fund is bought from and redeemed with the fund house at NAV.

In India: Under SEBI’s categorisation as revised in February 2026, index funds and ETFs are grouped under “other schemes”. Passive funds disclose their tracking error, which helps when comparing funds on the same index.

Related terms

  • ETF

    Exchange Traded Fund

    A fund, usually tracking an index or holding gold or bonds, whose units are listed and traded on a stock exchange like shares.

  • Tracking error

    How much an index fund’s or ETF’s returns have deviated from its index over time; lower means it has followed the index more closely.

  • Benchmark

    The index a fund’s performance is measured against, chosen to represent the market or segment the fund invests in.

  • Expense ratio

    The yearly cost of running a mutual fund scheme, shown as a percentage of its assets and deducted from the scheme before NAV is published.

  • Diversification

    Spreading money across different investments so that a loss in any one of them has a limited effect on the whole portfolio.

  • Equity

    Ownership in a company through its shares; equity investors share in the company’s growth and profits, and bear the risk of losses.