How To Invest In Index Funds In 2025: Complete Guide For Beginners
If you have been curious about investing but feel overwhelmed by financial jargon, like stock tips, mutual funds, charts, and market volatility–you are not alone. Many first-time investors want to grow their wealth safely, without spending hours tracking the stock market or becoming finance experts.
That is where index funds come in. Index funds are one of the most beginner-friendly investment options available today. They offer diversified exposure to the stock market, lower risk compared to individual stocks, and minimal fees, making them ideal for long-term, passive investors.
In this blog, we will explain how index funds work, why they are a great option for Indian investors, and how you can start investing in index funds with as little as INR 500 per month. From Nifty 50 index funds to Sensex-based funds, we will cover all you need to know to build a solid, long-term investment portfolio.
What Are Index Funds In India?
In technical terms, index funds in India are a kind of mutual fund or ETF (exchange-traded fund) that derives its value from a market index. These are based on indices. For example, a Nifty 50 index fund invests in the top 50 companies listed on the National Stock Exchange (NSE), in the exact same proportion as the index.
Hence instead of picking individual stocks like Infosys or Tata, the index fund invests in all 50 at once. This will automatically track the market’s performance of the index. When the value of the index rises, your fund value increases too. When it drops, so does your investment. It is a passive investment, but over the long-term, it often beats many actively managed funds.
According to data, Index funds in India have seen a drastic 12X increase in its contribution to the mutual fund industry since 20201.
Indeed, index funds investment in India are becoming a popular choice for retail investors who seek to invest in the Indian economy and indices in a simple and low-cost way.
Why Index Funds Make Sense For Beginners
Investing in index funds for the long-term can be a kickstart for young investors who want higher and safer returns.
These are especially valuable for beginners as:
1. Low Fees, Higher Returns
One of the biggest advantages is the low expense ratio in index funds, which is basically the annual fee charged by the fund to manage your investments. As index funds are managed passively, they do not require a team of analysts or fund managers constantly picking stocks.
For example, a popular TATA Nifty 50 Index Fund has an expense ratio of only 0.19%2.
Lower costs can boost your long-term returns significantly. Over 20 years, this annual cost difference can compound into lakhs.
2. Built-in Diversification
One of the biggest investment risks is putting all your money in one or two stocks. With index fund diversification, you are buying into an entire market index that includes dozens (or even hundreds) of companies. These indices have companies from multiple sectors like banking, technology, pharmaceuticals, energy, defence, and more.
For example, if tech stocks fall but the banking or defence sector is doing well, your overall portfolio remains more stable.
3. Less Emotional Investing
When you invest in individual stocks, it is easy to get swept up in market sentiment. The circle of emotional decision-making, buying at high price and selling at low, is one of the most common ways investors lose their own returns.
Index funds take emotion out of the equation. Rather than chasing the trending stocks or juggling through news, you are buying a broad market index, like the Nifty 50 or Sensex, which represents the overall economy. This way, you are investing in the long-term growth of the entire market.
How To Start Investing In Index Funds In India
To begin with your investment journey in index funds, these are some points you must check:
1. Choose The Right Index
Not all indices are the same. Each one tracks a different segment of the market, and your choice should depend on your risk tolerance, return expectations, and financial goals. Here are some of the popular Indian indices you should know:
- Nifty 50: This is India’s benchmark index, which represents the top 50 large-cap companies across various sectors. It's known for stability and steady growth.
- Sensex: The Sensex tracks 30 well-established companies listed on the Bombay Stock Exchange (BSE). Its stability and historical performance make it a popular choice for conservative and long-term investors.
- Nifty Next 50: This is kind of a “rising stars” just behind the Nifty 50. These are large-cap companies that have high growth potential. This index is for investors with a high-risk appetite.
- Nifty 500: This index offers the broadest market exposure, covering the top 500 companies. It includes large, mid, and small caps, which gives diversified long-term growth.
- Sector-specific indices: Sectors specific indices such as Bank Nifty, Nifty IT are generally more volatile and seasonal. They can generate strong returns but should be used to complement your core holdings, not replace them.
2. Direct Vs Regular Plans:
The difference between direct plans and regular plans is the source of purchasing the fund, and more importantly, how much you pay in hidden costs. Let us see how these work:
- Direct Plans: These are bought directly from the fund house or through online channels that don’t involve intermediaries. Since there is no middleman, no distribution commissions are charged, which means the expense ratio is comparatively lower.
- Regular Plans: These are purchased through agents, brokers, or financial advisors. The intermediaries earn a commission from the fund house, which is included in the fund’s annual expense ratio.
3. SIP Or Lump Sum
Both Systematic Investment Plan (SIP) or Lump Sum investment, each has its own advantages depending on your choice of investment.
- An Index fund SIP lets you invest a small fixed amount regularly (say INR 1,000/month). Since you are investing across different market levels over time through SIP, you benefit from market price differences, buying more units when prices are low and fewer when prices are high, which balances out your overall purchase cost.
- Lump sum investment can be considered when you have a large amount to invest. It allows you to put the entire amount into the market immediately, which can be effective when markets are relatively low or if you are confident about long-term growth.
Where To Buy Index Funds?
You can invest in the index funds through various index funds platforms in India. There are online platforms that support direct plans, SIPs, and real-time tracking. Most platforms offer to start with as little as INR 100–INR 500, and require no paperwork. They offer a simple and paperless onboarding process. Just complete your KYC, link your bank or UPI account, and you are ready to invest.
Best Way To Add Index Funds To Your Portfolio
This mainly depends on your investment goal. But as a beginner, consider index funds as your base layer, which is steady, dependable, and always working in the background.
These funds offer low-cost exposure to the economy’s growth. You can combine them with other funds or stock investments, but index funds can be kept as a core in your portfolio.
Top Things To Know Before You Invest In 2025
1. Asset Class: Know what the index covers- large-cap, mid-cap, multi-cap, or sectoral, as it affects your risk-return profile.
2. Expense Ratio: Select funds with a comparatively low expense ratio to maximise your returns.
3. Past Performance Consistency: Funds that have shown stable performance over 3–5 years, indicates a good sign of reliability and fund management quality.
4. AUM (Assets Under Management): A higher AUM indicates trust and fund stability. Larger funds are often more liquid and managed better.
5. Reputation of Fund House: Prefer well-known and trusted fund houses with a strong performance history and regulatory credibility.
Conclusion
Index funds are one of the simplest and smartest ways to begin your investing journey in 2025. With low costs and long-term growth potential, they offer a beginner-friendly path to wealth creation. If you are investing through SIPs or a one-time lump sum, index funds can form a strong, steady core of your portfolio.
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FAQs On Index Funds In India
1. Are index funds better than actively managed funds?
Index funds are often better than actively managed funds for most investors, especially beginners. They have lower fees and offer broad diversification. While some active funds may outperform temporarily, most fail to consistently beat their benchmark after costs.
2. Can I invest in index funds through SIP?
Yes, you can invest in index funds SIP. It’s a convenient way to invest regularly, starting with as little as INR 100 per month, helping you stay disciplined and benefit from rupee cost averaging.
3. What’s the average return from index funds?
Over the long term, Large-cap index funds like various index funds have delivered average annual returns of 8-10% over the past 10 years (as of June 25, 2025)3.
References:
1. The Economic Times, accessed from: https://economictimes.indiatimes.com/mf/mf-news/index-funds-take-top-spot-as-fastest-growing-category-in-sip-aum-zerodha-fund-house/articleshow/116472639.cms?from=mdr
2. Tata Mutual Fund, accessed from: https://www.tatamutualfund.com/mutual-funds/tata-nifty-50-index-fund-direct-growth
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