What is an index fund, and why beginners start there

What it is. An index fund is a mutual fund that simply copies the whole market instead of trying to beat it. A “market index” is just a ready-made list of the biggest companies, like the Nifty 50 (India’s 50 largest) or the Sensex (30). The fund buys those same companies in the same proportion, so no manager picks stocks; it just tracks the market.

Why beginners start here. Three reasons. One, it is cheap: with no manager picking stocks, the fee, called the expense ratio, is low, often around 0.2% a year, against roughly 1 to 2% for an active fund. Two, you get instant diversification: one fund spreads your money across many companies at once, so no single company sinks you. Three, no guessing: you are not trying to pick winners, you ride the whole market.

Did you know? Even the professionals mostly fail to beat the market. Over the five years to the end of 2024, about 93 out of every 100 actively managed large-cap funds in India did worse than their benchmark index (S&P Dow Jones Indices SPIVA India Scorecard, year-end 2024). These figures are published afresh each year, so check the latest, but the long-run pattern is steady: paying someone to beat the market usually does not pay off.

The fee adds up. A lower expense ratio means more of your money stays invested and compounds. Over years, the gap between 0.2% and 1.5% a year is large. The exact fees vary, so check each fund’s factsheet.

The honest part. An index fund matches the market, it does not beat it. When the market falls, your fund falls too. It is a simple, low-cost way to invest, not a way to avoid risk.

How to start. You can start an index fund through any mutual fund app, often as a SIP, with as little as ₹500 a month.

New to investing? Start on the learn page.