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Invest in Top Nifty 50 Mutual Funds In 2021: High Return Mutual Funds In India

Looking to Invest in Top Nifty 50 Mutual Funds? Here is a list of Top Nifty 50 Mutual Funds. Learn about various factors such as returns, risks and taxation associated with Nifty 50 Mutual Funds.

Investing in large-cap stocks through active and passive funds

An investor has two options for investing in large-cap stocks: large-cap active funds or Nifty 50 index funds. In an active fund, the fund manager's objective is to outperform the underlying index. However, many fund managers have found it difficult to outperform the underlying index in the last couple of years. Hence, we need to question whether the high expense ratio charged for active funds is justified. The other option is to invest in low-cost Nifty 50 index funds that mirror or replicate the Nifty 50 Index. This article focuses on how to invest in top Nifty 50 mutual funds in 2021.

What is a Nifty 50 Index Fund?

A Nifty 50 Index Fund invests in all Nifty 50 stocks in the same proportion as their weightage in the Nifty 50 Index. A Nifty 50 Index Fund replicates or mirrors the performance of the Nifty 50 Index. As per SEBI guidelines, a Nifty 50 Index Fund manager has to invest a minimum of 95% of the scheme assets in the Nifty 50 stocks.

Although a Nifty 50 Index Fund tries to replicate the performance of the Nifty 50 Index, on most occasions, the fund's returns are slightly lower than the returns of the Nifty 50 Index. It happens due to factors like expense ratio, tracking error, etc.

Returns provided by the best Nifty Index Fund

Let us look at the returns provided by the best Nifty 50 Index Fund in the last five years.

Table: Nifty 50 Index Fund returns

Scheme nameAUM (Rs. crores)1-year3-years5-years
IDFC Nifty Fund36914.10%18.49%15.76%
UTI Nifty Index Fund6,01114.30%18.36%15.67%
HDFC Index Fund – Nifty 50 Plan4,62714.24%18.21%15.59%
Tata Index Fund – Nifty23014.18%18.22%15.56%
Nippon India Index Fund – Nifty Plan44214.20%18.22%15.53%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/index-fundsetfs.html)

Note: The returns are as of 16th Feb 2022. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked based on five-year performance.

Who should invest in Nifty 50 Index mutual funds?

An investor looking for exposure to all Nifty 50 stocks in proportion to their weightage in the Nifty 50 Index should invest in a Nifty 50 Index mutual fund. An investor who is happy with the index returns or market returns rather than outperformance should invest in a Nifty 50 Index mutual fund. By investing in a Nifty 50 Index fund rather than an active large-cap fund, the investor benefits from low cost in the form of a low expense ratio.

Taxation of mid-cap funds

For taxation purposes, Nifty 50 index mutual fund schemes are treated as equity schemes and taxed accordingly.

  1. Short-term capital gains (STCG) tax: If you sell your Nifty 50 Index mutual fund scheme units within twelve months of purchase, the capital gain will be classified as short-term capital gain (STCG). The short-term capital gain (STCG) tax will be levied at 15%.
  2. Long-term capital gains (LTCG) tax: If you sell your Nifty 50 Index mutual fund scheme units after twelve months of purchase, the capital gain will be classified as long-term capital gain (LTCG). Every financial year, the first Rs. 1 lakh long-term capital gain will be exempt from taxation. The incremental long-term capital gain above Rs. 1 lakh will be taxed at 10%.

Risks involved in Nifty 50 Index funds

As discussed earlier, a Nifty 50 Index fund mirrors or replicates the Nifty 50 Index. So, when the Nifty 50 goes up, the index fund investors will benefit. However, whenever the Nifty 50 falls, the same will reflect in the index fund investors’ returns. So, Nifty 50 Index fund investors are exposed to the risk of the Nifty 50 seeing big falls. 

During uncertain times like the 2008 Subprime crisis and the 2020 Covid-19 pandemic, the Nifty 50 Index fell by more than 50%. The Nifty 50 Index fund investors also saw heavy losses in their investment portfolios during that time. However, over time, the Nifty 50 recovered all its losses and went on to make new highs. So, in the long run, the risk of the Nifty 50 index giving negative returns reduces.

Return potential of Nifty 50 Index mutual funds

Since its inception, the Nifty 50 Index has given excellent returns to its investors. These returns have been replicated by Nifty 50 Index mutual funds for their investors.

Chart: Nifty 50 Index returns

Source: https://archives.nseindia.com/content/indices/ind_nifty50.pdf)

The above chart shows the Nifty 50 Index was launched in April 1996 with a base value of 1,000. As of 31st Jan 2022, the Nifty 50 Index is trading above levels of 17,500. So, in the 25 years since its launch, the Nifty 50 Index has multiplied investor wealth by around 17.5 times. Since its inception, the Nifty 50 Index has given a return of 11.48% CAGR. For a long-term investor, this is a very good return.

In the long run, Nifty 50 Index fund investors have benefited from the magic of compounding. Investors should start a systematic investment plan (SIP) in a Nifty 50 Index fund for their long-term financial goals, such as building a fund for a child's higher education or building a retirement fund. Compounding works wonders in the long run and has the potential to give excellent returns.

Advantages of Nifty 50 mutual funds

The biggest benefit for investors is that they earn market returns by investing in a Nifty 50 mutual fund. These funds have a low cost as the expense ratio is lower than active large-cap funds.

Reasons to invest in Nifty 50 index mutual funds

By investing in a Nifty 50 Index fund, an investor gets exposure to India's top 50 companies by market capitalisation. Most of these companies are leaders in their sector. They have a long track record of growth, good profit margins, consistent dividend payment, and creating shareholder wealth. The Nifty 50 Index returns chart in the earlier section shows how it can give inflation-beating high returns and compound investor wealth.

Conclusion

If you are a long-term investor looking to create wealth to accomplish financial goals, the Nifty 50 Index fund is an excellent financial product to invest in. Most fund houses offer a Nifty 50 Index fund. You may choose a scheme with a low expense ratio, low tracking error, and a reasonable to high AUM.

To start investing in Nifty 50 Index mutual fund schemes as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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