Index funds refer to mutual fund schemes that are built to track a specific market index. Instead of a fund manager picking which securities go in the portfolio, the fund’s holdings are essentially shaped by the index it follows. In simple terms, an index is a defined basket of securities that represents a part of the market. The Nifty 50, for example, comprises 50 stocks across different sectors of the Indian economy. An index fund that tracks the Nifty 50 tries to match the performance of the Nifty 50 index, with minimal variance.

This is called passive investing because the goal is to mirror the benchmark rather than make active calls in an attempt to beat it. In India, Index funds have grown into a fairly large chunk of the mutual fund industry. As of June 2026, 375 index fund schemes managed an AUM of about Rs. 3.36 lakh crore.

Index funds might make sense for you if you:

• Like a rules-based approach: What’s in the portfolio is decided by the index it follows, not by a fund manager’s individual calls.
• Don’t want to select individual securities: A single investment can give you exposure to multiple securities, depending on which benchmark the fund tracks.
• Want a portfolio with a clearly defined benchmark: You’ll know exactly which index the scheme is built to follow and can check its composition before putting money in.
• You’re okay with market ups and downs: Index funds don’t protect you from a falling market - if the benchmark drops, the fund tracking it drops too.
• You understand what exposure you’re actually taking on: Different indices cover different markets, asset classes, and sectors. A broad-market equity index fund is very different from a debt or sector-focused fund.

When you invest in an Index fund, your money goes into a portfolio built to replicate or track a specific index - generally holding the securities in that benchmark in the proportions its strategy calls for.

Say you invest Rs. 35,000 in an Index fund.

If the benchmark index rises by 6%, so will your investment:

Rs. 35,000 + (Rs. 35,000 x 6%) = Rs. 37,100

If the index falls by 6%, your investment does too:

Rs. 35,000 - (Rs. 35,000 x 6%) = Rs. 32,900

Note that there may be a minor variance between the index's performance and the fund's performance due to tracking errors, expense ratios and transaction costs. It is important to filter out index funds with massive tracking errors, since their whole point is to replicate the index.

The term Index fund is an umbrella term covering several types of passive investments - the main thing that sets them apart is which benchmark they follow.

• Broad-market Index funds: These funds track indices that are meant to represent a broad swath of the equity market. An example is the Nifty 50 fund.
• Market-cap-based Index funds: These funds give you exposure to a particular market-cap segment - large cap, mid cap, or small cap, depending on the benchmark.
• Sectoral Index funds: These funds are built around a specific sector, like banking, healthcare, or IT. Because exposure is concentrated in one sector, these funds have a different risk profile than a Broad-market Index fund.
• Strategy or factor-based Index funds: Some indices weigh and select securities using defined factors or strategies, rather than going purely by the market cap.
• Debt Index funds: Index investing isn’t just about equities - these funds track benchmarks made up of government securities, corporate bonds, or other eligible fixed-income instruments.

Thus, even though two Index funds may be ‘passive’, they may work very differently based on what they’re actually tracking.

Index funds have a few features that can work in an investor’s favour:

• Straightforward approach: You can review the benchmark upfront and know exactly what market exposure the fund is meant to provide.
• No reliance on stock-picking: The portfolio follows the index’s methodology rather than being shaped by a fund manager’s judgement on which securities will do better.
• Diversification within the index: A broad index can spread your investment across several securities - though how diversified you actually are depends on what’s in the index.
• Transparent portfolio: Since the scheme sticks to a defined benchmark, you can get a good sense of the portfolio’s structure just by looking at the underlying index.
• Potentially lower costs: Passive funds typically need less active research and decision-making, which can mean lower costs. That said, expense ratios still vary between schemes, so it’s worth comparing the actual numbers before you invest.

Being passive doesn’t make an Index fund risk-free. Here are some risks you should understand before investing:

• Market risk: When the securities in the benchmark fall, the fund generally falls with them.
• Index-specific risk: How much risk you’re taking depends heavily on the benchmark. A single-sector fund can be a lot more concentrated than one tracking the broad market.
• Concentration risk: Some indices lean heavily on a handful of securities. When that happens, those few heavily-weighted names can end up driving most of the index’s performance.
• Tracking risk: The fund’s returns won’t necessarily mirror the benchmark perfectly - cash holdings, expenses and how the portfolio is actually implemented can all create gaps.
• No guaranteed returns: Index funds don’t promise assured returns, and how the index performed in the past doesn’t tell you how it will perform going forward.

How can you approach these risks?

• Understand the benchmark: Check which companies, securities, asset classes or sectors it actually represents. Two Index funds can carry completely different risk profiles.
• Avoid unnecessary overlap: If you’re already heavily exposed to a particular market segment or sector, another fund tracking a similar index just leads to more concentration.
• Match it to your time horizon: Think about your financial goals - about when you will actually need the money and make sure the investment horizon matches the same.
• Read the Riskometer: SEBI mandates that all mutual fund schemes should display a Riskometer. Study and understand the risk involved before investing.

The main difference between the two is how the portfolios are constructed and managed.

Here are a few things to consider if you are planning to invest in an Index fund:

• Underlying index: Check the benchmark first. A Nifty 50 Index fund and a sectoral index fund might both be ‘passive’, but the exposure they give you is very different.
• Tracking difference and tracking error: Look at how closely the fund has actually tracked the benchmark, rather than just looking at the returns in isolation.
• Expense ratio: Compare costs across schemes tracking the same or similar indices - that cost eats into what you actually take home.
• Risk: Read and understand the Riskometer carefully. Understand the full extent of the risks involved before investing.
• Financial goal: Check whether the benchmark, time horizon and the risk level match what you’re investing for.

You can start investing in Index funds on Millions by following these steps:

• Download the Millions app from the Google Play Store or the iOS App Store.
• Enter your details and complete the KYC process.
• Search for all Index mutual funds available on the platform.
• Check each fund’s underlying index, expense ratio, Riskometer and tracking information.
• Choose your SIP date, enter the amount you wish to invest, enter the frequency of your SIP, and complete the payment.

It’s as simple as that. You do not need a large sum of money to start investing. Start small, and over time, increase your SIP amount.