What is an index fund?
An index fund is a mutual fund (or ETF) that mechanically buys every stock in a published index, in the same weights as the index. There is no fund manager picking stocks. The Nifty 50 fund holds the 50 largest companies on the NSE in proportion to their market cap. Expense ratios are usually 0.05% to 0.2%, against 1.0% to 2.0% for actively managed funds. The fund's return matches the index minus the expense ratio and a small tracking error.
Over the last 10 years, the Nifty 50 TRI returned about 13% CAGR. The average large-cap active fund returned about 12.2% (SPIVA India). After expenses, fewer than one in five active large-cap funds beat their index. Picking that one fund in advance is the hard part.
Owning five index funds tracking similar indices. A Nifty 50 fund and a Nifty Next 50 fund overlap in the next-tier names; adding a third large-cap index just adds noise. One broad-market index fund (Nifty 500 or Nifty Total Market) covers most of the work.
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