Mutual funds have been around for years as a trusted investment option for growing wealth. However, slowly but effectively, index funds have also caught up to the same level, and their popularity can also be seen as growing way more than that of mutual funds.
An AMFI report showed that the mutual fund SIP contribution hit a record of Rs 27,269 crore in June 2025, indicating a strong trust in mutual funds1. However, on the other hand, the Nifty 50 index fund also grew 5 times in 5 years, which is just as impressive2. All these data show that both mutual funds and index funds are worthy competitors.
In this article, you will explore the dynamics between mutual funds vs index funds and thus learn which investment option could be the better one for you.
While looking for investment options for growing your money, both mutual funds and index funds have been somewhat popularized. Both of these options have a distinct approach to management, investment, strategies, etc. With the basic differences between mutual funds vs index funds, you can learn where and how to invest better.
What Are Mutual Funds?
A Mutual Fund is a type of investment option that pools money from several investors to invest in a diversified portfolio of assets like stocks, bonds, and other securities. Investing in a broader range can help in spreading risks. It allows investors to earn returns for a long period of time with the help of professional fund managers who make crucial decisions for investors.
What Are Index Funds?
Index funds are a type of investment that tracks the market index of specific stocks, such as the NSE Nifty, the BSE Sensex, etc. In this kind of investment, the fund manager does not actively participate in picking stocks or changing portfolios. Index funds typically have lower fees than actively managed funds.
Understanding risks and returns for both kinds of investment options is crucial to deciding which one has better performance.
Here is how you can determine index funds vs actively managed mutual funds with respect to these factors:
Historical Return Trends in India (2020–2025)
Here are the index funds vs mutual funds returns India has:
Year | Mutual Funds(p.a) | Index Funds(p.a) |
2020 | 25-35% | 14-15% |
2021 | 18-22% | 24% |
2022 | 8-12% | 4-5% |
2023 | 15-18% | 20% |
2024 | 15-18% | 8-9% |
2025 | 9-10% | 6% |
Risk Levels And Volatility
Index fund investments are directly exposed to the volatility of the underlying index. For example, if the Nifty 50 index has historically shown annualized volatility of 16.6%, this volatility can cause fluctuations in your investment values.
Active mutual funds have comparatively higher risks. These funds can experience significant volatility, but also offer a potential for higher returns. An example of such is the FY2025, where small-cap funds faced sharp corrections, although they still outperformed their benchmarks.
Also Read: Market Volatility And Investment: Navigating Ups And Downs For Financial Success
Sometimes, in the case of mutual or index funds, several people focus only on returns without paying much attention to the expense ratio. The expense ratio is the annual fee that a fund charges to manage your money.
Although this fee percentage is typically seen as a small amount, it still has the power to reduce your overall returns, especially during long-term investments. Therefore, understanding the expense ratio can help you manage your funds and make better investment decisions.
Why Index Funds Are Cheaper
Index funds are a part of passive investing in India.. This means that these funds do not require a team of experts or a fund manager to choose stocks. Instead, the fund invests in each stock in the same proportion as represented in the index. With no payment for experts and lower research costs, the overall operational costs are much lower as well.
In contrast, mutual funds are managed by professionals through research, analyzing market trends, making trading decisions, etc. And such management comes with higher costs. It requires higher fees for professional management, costs associated with buying and selling securities, and more.
Do Lower Fees Always Mean Better Returns?
Lower fees can significantly impact your long-term investments. You can do so by preserving your capital and magnifying your returns. Two funds with the same gross rate, but different fees, can yield different returns over 10 to 15 years, while favoring the low-fee fund.
However, lower fees do not necessarily mean better returns. Active funds can outperform index funds in specific market conditions. Fund managers often justify their high fees with the promise of high returns as well. However, with consistency, even index funds can have higher returns.
Also Read: Hybrid Mutual Funds Taxation: Rules, Rates And How It Impacts You In 2025
As of 2025, many investors keep choosing index funds as a safe and secure option. It has low costs, it is transparent, and has consistent performance with the market benchmarks, all of which make it perfect for beginners, passive investors, and goal-based planners.
Although investors who are much more experienced and are not afraid of market risks often go for mutual funds. This is especially because these funds have higher returns and are actively managed funds in different categories, all of which can add a lot of value to your portfolio.
Therefore, the better investment for your portfolio completely depends on your experience as an investor. Moreover, you can also opt for both of these options to get maximum benefits.
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With a wide range of investment options available in 2025, selecting the right one becomes essential to avoid costly financial mistakes. The choice between mutual funds and index funds largely depends on your investment goals, risk appetite, time horizon, and how actively you want to manage your portfolio. Understanding the key differences between these options will help you choose what works best, whether it’s high-growth equity mutual funds or low-cost, passive index funds.
For investors looking to go beyond traditional choices, Grip Invest offers curated opportunities in fixed-income products like corporate bonds and lease-based investments, designed for stable returns and portfolio diversification.
1. Are index funds safer than mutual funds?
Index funds are comparatively considered safer than mutual funds for several reasons. These funds track broad market indexes and are managed passively, which minimizes human errors. However, there is still market risk as they do not provide protection against market downturns.
2. Which gives better returns in India: mutual funds or index funds?
For better returns in India, it is typically better to choose active mutual funds over index funds. Mutual funds offer higher returns, especially in mid and small-cap segments. However, in long-term investments, index funds also match up or outperform mutual funds.
3. Is it better to start a SIP in an index fund or a mutual fund?
For SIP in index funds vs mutual funds, remember that a low-cost, long-term investment, it is ideal to start a SIP in an index fund. Mutual fund SIPs may offer higher returns, but require more time and involvement in fund selection and performance tracking.
4. Can index funds beat actively managed mutual funds in India?
Yes, it is possible for index funds to beat mutual funds in India, especially the ones with large-cap segments, lower fees, and consistent performance. However, sometimes mutual funds in certain categories can still outperform, depending on market cycles and the fund manager.
References:
1. Association of Mutual Funds India, accessed from: https://www.amfiindia.com/mutual-fund
2. CNBC TV 18, accessed from: https://www.cnbctv18.com/personal-finance/nifty-50-index-funds-etfs-aum-grow-five-times-in-5-years-factors-driving-surge-returns-inflows-19634916.htm
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