Index Funds and ETFs India 2026: SEBI New 0.90% Cap Explained

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Part of our Mutual Funds India 2026 hub: Complete Guide to Mutual Funds India 2026

Vikram manages a team of analysts at a mid-size company. He reads the markets. He follows fund manager interviews. He has spent years trying to pick the mutual fund that will beat the index this year.

His brother Arun does none of that. Every month, Arun’s SIP buys units in a Nifty 50 Index Fund. He has never read a fund factsheet. He has not thought about which sector is going to outperform. His expense ratio is 0.10% per year.

After 10 years, the results are in. Vikram’s carefully selected actively managed large-cap funds have returned 11.2% per year. Arun’s index fund has returned 11.4% per year.

Arun did less, paid less, and earned more.

This is not an accident. It is mathematics. And it is the core argument behind passive investing — the fastest growing segment of India’s mutual fund industry.

As of 2026, passive funds (index funds and ETFs) now account for approximately 19% of India’s total mutual fund AUM. Passive fund AUM crossed Rs 10 lakh crore for the first time in 2025. And SEBI’s new expense rules effective April 2026 are making them cheaper than ever.

This article explains what index funds and ETFs are, how they differ, why the new SEBI expense cap matters, and how to choose the right one for your portfolio.

19% Passive fund share of total MF AUM

0.10% Typical expense ratio — Nifty 50 index fund

~13.9% Nifty 50 TRI 3-year CAGR (benchmark)

Apr 2026 SEBI new expense rules effective date

1. What Is an Index Fund?

An index fund is a mutual fund that tracks a specific stock market index — such as the Nifty 50, Sensex, or Nifty Next 50 — by holding the exact same stocks in the exact same proportions as that index.

There is no fund manager making investment decisions. There is no research team picking stocks. The fund simply mirrors the index. When Reliance Industries is 9.5% of the Nifty 50, it is approximately 9.5% of your Nifty 50 index fund. When the index adds or removes a company, the fund adjusts automatically.

This passive approach eliminates two major risks that actively managed funds carry: the risk of a fund manager making a wrong call, and the cost of paying a team of analysts to make those calls. The result is a simpler, cheaper, and surprisingly competitive investment.

According to SEBI’s mutual fund categorisation framework, index funds fall under the “Other Schemes” category and are passively managed. Each fund must clearly disclose the benchmark it tracks, replicate the index composition accurately, and report tracking error regularly to investors.

2. What Is an ETF?

An Exchange Traded Fund — ETF — is essentially an index fund that trades on a stock exchange like a regular share. You can buy and sell an ETF unit at any point during market hours at the live market price, just as you would buy a share of Reliance or Infosys.

The underlying portfolio of an ETF is the same as an index fund tracking the same benchmark. A Nifty 50 ETF holds the same 50 stocks in the same proportions as a Nifty 50 Index Fund. The difference is entirely in how you buy and sell it.

To invest in an ETF, you need a Demat account and a trading account — the same ones you use for stock trading. Index funds, by contrast, can be purchased through a mutual fund platform like MF Central, Groww, or Zerodha Coin without any Demat account.

3. Index Fund vs ETF – The Complete Comparison

Both track the same index. Both are cheap. But there are important practical differences that determine which one suits you better.

Factor	Index Fund	ETF
How to buy	Through MF platform — Groww, Zerodha Coin, AMFI-registered app	Through Demat and trading account — same as buying shares
Trading timing	Transact at end-of-day NAV only	Trade any time during market hours at live price
Minimum investment	Rs 500 via SIP — very accessible	1 unit at market price — varies by ETF
SIP facility	Yes — full SIP support	No direct SIP — must buy manually
Demat account needed	No — invest directly	Yes — mandatory
Expense ratio	Slightly higher than ETF — typically 0.10 to 0.20%	Lower — often 0.02 to 0.05%
Tracking error	Slightly higher than ETF	Generally lower due to real-time arbitrage
Liquidity	Redeem at NAV — T+2 settlement	Sell on exchange instantly — T+1 settlement
Best for	Beginners, SIP investors, those without Demat	Experienced investors, large lump sum, intraday flexibility

For most retail investors in India — particularly those investing monthly through SIP — an index fund is the more practical choice. It removes the need for a Demat account, supports automatic SIP, and is accessible through every major mutual fund platform from Rs 500 per month.

ETFs make more sense for investors who already have a Demat account, are deploying a large lump sum, and want real-time trading flexibility. For a long-term SIP investor, the marginal cost advantage of an ETF over an index fund (typically 0.05 to 0.10% per year) does not outweigh the operational simplicity of an index fund.

4. Why Expense Ratio Matters More Than You Think

Most investors ignore the expense ratio. It is a small number — 0.10%, 0.50%, 1.00%. It does not look meaningful. But compounded over 20 years, the difference between a 0.10% expense ratio and a 1.00% expense ratio is enormous.

The True Cost of a 1% Expense Ratio Difference Over Time

Scenario	Investment	Gross Return	Expense Ratio	Net Return	Value After 20 Years
Index Fund	Rs 10,000/month SIP	12% CAGR	0.10%	11.90%	Rs 97,28,000 (approx)
Active Large Cap Fund	Rs 10,000/month SIP	12% CAGR	1.00%	11.00%	Rs 91,58,000 (approx)
Regular Plan Active Fund	Rs 10,000/month SIP	12% CAGR	1.50%	10.50%	Rs 87,42,000 (approx)

Look at the bottom line carefully. The index fund investor and the regular plan active fund investor both invested the same Rs 10,000 per month for 20 years. The index fund investor ends up with approximately Rs 9.86 lakh more — purely because of the lower expense ratio.

This is not theoretical. It is the mathematical certainty that lower costs compound into a significant real-money difference over long investment horizons. The fund manager does not have to underperform for the active fund investor to lose ground — the cost alone does the damage.

5. SEBI’s New Expense Rules 2026 – What Changed

On December 17, 2025, SEBI approved a major overhaul of mutual fund expense rules, with key changes effective April 1, 2026. The overhaul covers all fund categories, but the impact on index funds and ETFs is particularly significant.

Key Changes Affecting Index Funds and ETFs

Change	Before April 2026	After April 2026	Impact on Investors
Total Expense Ratio (TER) cap for index funds and ETFs	Max 1.00% TER	Max 0.90% TER	Lower cap means fund houses must pass more savings to investors
Expense breakdown transparency	Single combined TER reported	Separate disclosure: management fee vs regulatory charges	Investors can now see exactly what they are paying for
Brokerage and transaction cost disclosure	Embedded in TER, not separately visible	Must be disclosed separately	Total cost of ownership becomes fully transparent
Additional charges for investor education	Allowed within TER	Moved out of TER — shown separately	TER comparison becomes cleaner and more comparable
GST on management fee	Included in TER figure shown to investors	Shown separately from fund management fee	Easier to compare true fund management costs across AMCs

The 0.90% cap for index funds and ETFs is the headline number, but the more important change is the transparency requirement. From April 2026, when you look at the expense ratio of any index fund, you will be able to see a clear breakdown: how much is the fund management fee, how much is SEBI regulatory charges, and how much is other levies.

This makes comparisons between funds much more meaningful. Previously, two index funds with the same headline TER might have very different underlying management fee structures. After April 2026, that difference is visible.

For most established Nifty 50 index funds, the effective expense ratio is already well below 0.90% — many are at 0.10 to 0.20%. The new cap primarily prevents future funds from charging higher amounts. It also sets a ceiling that protects new investors who might not know to check the expense ratio before investing.

6. Types of Index Funds and ETFs in India

The passive investing universe in India has expanded significantly. You can now track almost any market segment through an index fund or ETF.

Category	What It Tracks	Example Indices	Best For
Broad Market — Large Cap	India’s 50 or 100 largest companies	Nifty 50, Nifty 100, Sensex	Core equity holding — most investors start here
Broad Market — Mid Cap	Companies ranked 101 to 250 by market cap	Nifty Midcap 150, Nifty Next 50	Higher growth potential, more volatility
Broad Market — Small Cap	Companies ranked 251 and below	Nifty Smallcap 250	Aggressive growth investors, 10+ year horizon
Factor-Based (Smart Beta)	Stocks selected by specific factor — value, quality, momentum	Nifty Alpha 50, Nifty 200 Momentum 30	Investors wanting factor exposure at index cost
Sectoral ETF	Single sector — banking, IT, pharma, energy	Bank Nifty, Nifty IT, Nifty Pharma	Tactical allocation to specific sectors
International ETF	Global indices — US, global emerging markets	Motilal Oswal NASDAQ 100, S&P 500	Geographic diversification beyond India
Gold ETF	Physical gold stored by custodian	Nippon Gold ETF, HDFC Gold ETF	Gold exposure without physical gold
Debt ETF	Government securities, corporate bonds	Bharat Bond ETF, Nippon Liquid BeES	Short-term parking, lower risk

7. Best Nifty 50 Index Funds and ETFs – Verified 2026 Data

The following data is based on verified fund performance as of early 2026. For index funds, the benchmark is the Nifty 50 Total Return Index, which has delivered approximately 13.9% CAGR over the 3-year period ending March 2026.

Top Nifty 50 Index Funds — for SIP Investors (No Demat Required)

Fund Name	3-Yr CAGR	5-Yr CAGR	Expense Ratio	AUM	Tracking Error
UTI Nifty 50 Index Fund	~13.9%	~12.6%	0.20%	Large AUM	Low
HDFC Index Fund — Nifty 50	~13.8%	~12.5%	0.20%	Large AUM	Low
ICICI Pru Nifty 50 Index Fund	~13.9%	~12.5%	0.17%	Large AUM	Very Low
Nippon India Index Fund — Nifty 50	~13.8%	~12.4%	0.20%	Mid AUM	Low
SBI Nifty Index Fund	~13.7%	~12.4%	0.20%	Large AUM	Low

Top Nifty 50 ETFs — for Investors with Demat Account

ETF Name	3-Yr CAGR	Expense Ratio	Tracking Error	Liquidity
ICICI Pru Nifty 50 ETF	~13.86%	0.02%	0.02-0.03%	Very High
SBI Nifty 50 ETF	~13.85%	0.07%	Low	High
Nippon India ETF Nifty 50	~13.86%	0.04%	Very Low	High
UTI Nifty 50 ETF	~13.85%	0.03-0.05%	Very Low	High
Mirae Asset Nifty 50 ETF	~13.85%	Competitive	Low	Growing

A few practical observations. For most investors starting with a SIP of Rs 500 to Rs 10,000 per month, the UTI Nifty 50 Index Fund, HDFC Index Fund, or ICICI Pru Nifty 50 Index Fund are excellent starting points. They have large AUMs that ensure liquidity, very low expense ratios, and consistent tracking of the benchmark.

For investors with a Demat account deploying a large lump sum, the ICICI Pru Nifty 50 ETF stands out with an expense ratio of just 0.02% — one of the lowest in the industry — and a tracking error of 0.02 to 0.03%.

The most important selection criteria for any index fund or ETF are: first, expense ratio (lower is always better, all else equal); second, tracking error (lower means more accurate index replication); and third, AUM (larger funds have better liquidity and lower operational costs). Returns themselves will be nearly identical across well-run index funds tracking the same benchmark.

8. How to Invest in an Index Fund — Step by Step

Q: Q2: Which is the best Nifty 50 index fund in India 2026?

There is no single best fund -- the top Nifty 50 index funds from UTI, HDFC, ICICI Prudential, and Nippon India all deliver near-identical returns because they track the same benchmark. The most important selection criteria are: choose the fund with the lowest expense ratio (look for direct plans at 0.10 to 0.20%), the lowest tracking error, and a large AUM for good liquidity. All four funds mentioned meet these criteria well. Verify the latest data at amfiindia.com before investing.

Investing in an index fund is the simplest investment process in the mutual fund world. Here is the exact process.

For an Index Fund (via SIP -No Demat Required)

Complete KYC once at MF Central (mfcentral.com) using Aadhaar and PAN. This covers all future mutual fund investments.
Choose your index fund. For most beginners: UTI Nifty 50 Index Fund or HDFC Index Fund — Nifty 50. Check expense ratio and AUM on AMFI’s website.
Open an account on Groww, Zerodha Coin, Paytm Money, or directly on the AMC’s website. Always choose the Direct plan — it costs less with no distributor commission.
Set your SIP amount (minimum Rs 500 per month) and choose a date 3 to 5 days after your salary credit date.
Authorise the NACH mandate with your bank. Your SIP runs automatically every month from the next due date.

For an ETF (via Demat Account)

Ensure you have a Demat and trading account with any SEBI-registered broker — Zerodha, Groww, HDFC Securities, etc.
Search for the ETF by its symbol. For example: ICICIB50 for ICICI Pru Nifty 50 ETF, SETFNIF50 for SBI Nifty 50 ETF.
Place a buy order during market hours at the live market price. Treat it exactly like buying a share.
ETFs do not have a SIP facility. You must set up a calendar reminder or use your broker’s automatic buy feature if available.

9. Index Funds vs Active Funds – The Honest Debate

This question generates strong opinions on both sides. Here is the data-based answer.

Factor	Index Fund	Active Fund
Expense ratio	0.10 to 0.20% (direct plan)	0.50 to 1.80% (direct plan)
Performance vs benchmark	Matches benchmark minus expense ratio	May outperform or underperform benchmark
Manager risk	None — no human decisions	Present — depends on fund manager quality
Consistency	Very consistent — market returns every time	Variable — performance depends on market cycle
Transparency	Always holds exactly the index stocks	Portfolio can change significantly month to month
Tax efficiency	Lower portfolio turnover means fewer taxable events	Higher turnover may trigger more capital gains
Best suited for	Large Cap category — hardest for managers to beat	Mid and Small Cap — more inefficiency to exploit

The most honest answer to the active vs passive debate in India is this: for large-cap investing, index funds win on cost and often on returns. For mid-cap and small-cap investing, skilled active managers have historically found more opportunities to outperform because these segments are less researched and less efficiently priced.

A practical portfolio for most Indian investors: use a Nifty 50 Index Fund as the core holding (50 to 60% of equity allocation), then add a well-rated active mid-cap or flexi-cap fund for the remaining portion. This gives you the cost efficiency of passive investing at the foundation while retaining the potential outperformance of active management in the higher-growth segments.

10. Frequently Asked Questions

Q1: What is the difference between an index fund and an ETF?

Both track the same index and hold the same underlying stocks. The key difference is how you buy them: an index fund is purchased through a mutual fund platform like Groww or directly from the AMC, using end-of-day NAV, and does not require a Demat account. An ETF trades on a stock exchange like a share, requires a Demat account, and can be bought or sold any time during market hours at the live price. For SIP investors, an index fund is more convenient.

Q2: Which is the best Nifty 50 index fund in India 2026?

There is no single best fund — the top Nifty 50 index funds from UTI, HDFC, ICICI Prudential, and Nippon India all deliver near-identical returns because they track the same benchmark. The most important selection criteria are: choose the fund with the lowest expense ratio (look for direct plans at 0.10 to 0.20%), the lowest tracking error, and a large AUM for good liquidity. All four funds mentioned meet these criteria well. Verify the latest data at amfiindia.com before investing.

Q3: Is investing in Nifty 50 index fund safe?

A Nifty 50 index fund carries the same market risk as the Indian equity market — if the Nifty 50 falls, your index fund falls by a similar amount. However, it eliminates fund manager risk (no human making bets), portfolio concentration risk (spread across 50 large companies), and is SEBI-regulated. Over any 7-year or longer period in Indian market history, the Nifty 50 has delivered positive returns. For long-term investors, it is considered one of the most reliable equity investments available.

Q4: What is tracking error in index funds?

Tracking error is the difference between the index fund’s actual return and the benchmark index’s return over a period. A low tracking error (0.02 to 0.10%) means the fund is accurately replicating the index. A higher tracking error means the fund is deviating from the benchmark, usually due to a higher expense ratio, cash held in the fund, or delays in rebalancing. Always check tracking error alongside expense ratio when comparing index funds — a fund with a low expense ratio but high tracking error may still underperform a slightly more expensive fund with lower tracking error.

Q5: Should I choose an index fund or an active fund?

For large-cap investing, index funds are the better choice for most investors — they cost less, carry no manager risk, and historically match or beat most active large-cap funds after fees. For mid-cap and small-cap investing, skilled active managers have more room to outperform because these segments are less efficiently priced. A practical approach for most investors: use a Nifty 50 index fund as the core holding (50 to 60% of equity allocation) and add a well-rated active mid-cap or flexi-cap fund for the balance.

Conclusion

Index funds and ETFs are not a compromise. They are a deliberate, rational choice that has rewarded patient investors across every major market in the world — and increasingly in India too.

The new SEBI expense rules effective April 2026 make them cheaper than they have ever been. The Nifty 50, which has delivered approximately 12 to 14% CAGR over the long term and 76.67% total returns in the 5 years ending January 2026, is one of the most reliable wealth-building vehicles available to Indian retail investors.

You do not need to follow markets. You do not need to read fund manager interviews. You do not need to worry about whether this year’s top-performing fund will repeat its performance next year. You need a KYC, a platform, Rs 500 a month, and the discipline to not stop when markets fall. The rest takes care of itself.

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Author

CA Ajay Khandelwal is a Chartered Accountant and financial expert with over 21 years of experience in taxation, compliance, and business advisory. As a key expert at AspirixWriters, he provides practical insights on income tax, financial planning, and regulatory matters, helping readers make informed financial decisions.

Author profile CA. Ajay Khandelwal

Disclaimer

This article is for educational and informational purposes only. It does not constitute personal financial advice, investment advice, or a recommendation to invest in any specific index fund or ETF.

Mutual fund and ETF investments are subject to market risks. Returns from index funds are market-linked and not guaranteed. Past performance is not indicative of future results. All return figures cited are based on historical data and are illustrative. Actual returns will vary.

For personalised investment advice, consult a SEBI-registered Investment Advisor. Find one at: sebi.gov.in

Index Funds and ETFs India 2026: SEBI New 0.90% Cap Explained