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 List Of Best Low Expense Ratio Index Funds To Invest In India in 2022

Do you want to invest in low-cost index funds in India? Learn about the best index funds with the lowest expense ratio in India and other mutual fund costs

Index funds are counted amongst the most sought-after passive investment options out there in the market, owing to their broad market exposure, low operating cost, and decent returns generating ability. If you are considering investing in index funds, there are plenty of low-expense ratio index funds available to help you maximize your return on investment like no other. 

First, let's start by understanding index funds. 

What are index funds?

Index funds are passive mutual funds that replicate popular market indices such as NSE Nifty and BSE Sensex. Unlike actively managed funds, in index funds, the fund manager's role in building the investor's portfolio is minimal. In index funds, the fund manager copies the underlying index to create the investor's portfolio and keeps it in sync with the index to realize the returns. If the underlying index has certain stocks in a specific percentage, the fund manager also includes and maintains the same weightage in their portfolio. When the weight of the stocks within the index changes, the fund manager either buys or sells units from the portfolio to keep it aligned with the index. 

Best index funds with the lowest expense ratio to invest in India in 2022

The following table shows some of the best low-cost index funds in India to invest in 2022 and their returns over the years.

Scheme Name
Direct (G)
Expense RatioAUM(Rs. crores)1 year3 years5 years
HDFC Index Fund - Sensex Plan - (Direct (G)0.20%3,733.941.23%18.79%13.71%
HDFC Index Fund Nifty 50 Plan - Direct (G)0.20%6,624.041.27%18.97%12.70%
Nippon India Index Fund Nifty 50 Plan - Direct (G)0.20%545.741.31%19.03%12.63%
DSP Nifty 50 Index - Fund Direct (G)0.22%215.61.30%18.87%NA
Tata Nifty 50 Index - Fund Direct (G)0.16%292.64-3.86%14.41%12.48%

What is the expense ratio, and why should you consider it?

An expense ratio is essentially a fee that investors pay to mutual fund houses. It covers various charges that investors incur while investing in mutual funds, such as management fees (for portfolio management, strategy, and planning), administration charges (for record-keeping and customer support), and distribution fees (advertising and promotional charges). The expense ratio is the percentage of charges a fund house collects from investors to manage their portfolios. 

The expense ratio can be calculated as,

Expense ratio = the mutual fund’s total expenses/ fund’s total assets under management 

There are certain limits set under SEBI Mutual Fund Regulations for the expense ratio that funds can charge from investors. While complying with the set limits, every fund house has a different expense ratio that varies with the investment strategy. Generally, when a fund’s asset under management is less, the expense ratio is higher and vice versa. Also, if you invest through index funds, the expense ratio will be a lot lesser as these are passive funds and require less effort from the fund manager. On the other hand, active funds attract higher expense ratios as they require considerable industry experience and expertise to drive desired results from investments. Most tax-saving funds in India have an expense ratio ranging from 0.1% to 3.5%. 

A mutual fund expense ratio is one of the essential factors that investors must consider before investing. That is so because fund operating and management fees directly impact your returns. While a lower expense ratio means more profitability to your account, a higher expense rate can considerably lower your profits. 

Let's take an example of the expense ratio and try to understand how they are calculated and their effect on net investment profits. 

Consider two mutual funds, A and B. Both funds generate an average annual investment return of 10%, with A charging fees of 1% and B charging 2%. (This seemingly small percentage difference may not be significant for most investors visually as the fee amount is based on the AUM, not the profits earned)

Now let's move forward and consider there are investors 1 & 2 who have invested Rs 1 lakh respectively at the beginning of the year. Investor 1 invests in mutual fund A and Investor 2 invests in mutual fund B with the same rate of return, which is 10%. Now, A and B funds generate a 10% return on investment (excluding the fees). As per the fee percentage, Investor 1 has to pay 1% as fees, which means Rs 1000 of his Rs 10000 profit, whereas Investor 2 will pay 2% as a fee which is Rs 2000 of his Rs 10000 profit. You must have noticed that this slight difference in the 1% expense ratio has significantly impacted the returns of Investor 2 more than investor 1. The impact of the expense ratio is more significant, especially if the rate of return is less. Hence, it is imperative to be aware of the fund house charges beforehand, so you choose the index funds with the lowest expense ratio in India.

How to reduce the expense ratio on your investments

Every service or product comes with a fair share of the price tag, and so are mutual funds that levy investors a fee as an expense ratio for their portfolio management. While one cannot avoid these fees, certain ways will help reduce the overall investment cost. 

  • Add passive investment to your portfolio: Investors who invest in actively managed funds pay more fees (fund managers' fees & other administrative charges) than passive investments or investors who handle their investments. One of the easiest ways to cut your investment cost is to move into a passive investment. You can invest in the best index funds in India with the lowest expense ratio that tracks an underlying index or ETFs that trade in real-time, like stocks. 
  • Find a fund house with a lower expense ratio: If you still prefer a fund manager running your portfolio, select an actively managed fund that keeps the expense ratio less than 1%. Remember, a lower expense ratio doesn't impact your fund's performance. They are also capable of providing better and higher returns on investments. So you must compare the expense ratios of various fund schemes and decide on the one offering the better deal. 
  • Avoid trading frequently: If you have invested in mutual funds and regularly trade and contribute to an account, you can think about waiting a little longer to make purchases until you build up a larger amount of cash and then transact. Doing so will have fewer transactions and related fees, thus helping you reduce your investment cost. 

Costs other than the expense ratio associated with mutual funds 

Apart from the expense ratio, there are additional charges as well that have to be paid by the investors as part of their investment in index mutual funds.

  • Stamp duty: Stamp duty is basically a tax that investors incur on purchasing the fund units. As per the current SEBI laws, stamp duty gets applied at a rate of .005% on the purchase of funds units. Suppose the fund units get issued for an investment of Rs 1 lakh in a scheme, then a tax of Rs Rs 5 as stamp duty has to be paid by the investor. It's a one-time charge but applies to every purchase you make. 
  • Entry load: A fee investors pay while entering a fund scheme. Different funds have different entry load charges. However, not all mutual funds ask for it. 
  • Exit load: A fee investors pay when they exit a mutual fund scheme. When investors redeem their fund units within the lock-in period, they are required to pay an exit charge. It is usually between .25% to 4% for each fund unit that an investor redeems. If an investor redeems units after the lock-in period, there are no exit charges.
  • Other miscellaneous charges: Some indirect changes that investors may incur during their investment tenure include opening a Demat account & its maintenance, brokerage charges, etc.

Who should invest in an index fund? 

Investors seeking predictable returns and having a moderate risk appetite can invest in index funds. However, investing in these funds is recommended for investors who have a long-term perspective and are willing to invest their money for a term, say at least seven years or more. That is so because index funds tend to get affected by market fluctuations. A longer time frame ensures that funds have enough time in the market to recover from these fluctuations, enabling them to achieve expected returns. Also, low expense ratio index funds in India don't require much research and tracking, which makes it ideal for investors who are just starting their investment journiey with mutual funds. Before investing in index funds, consider your financial goals and investment horizon. But most importantly, risk appetite so you can make the most of your investments. 


Got more queries? Check out this FAQs section and get them resolved at the earliest. 

Is investing in index funds a good option?

Index funds are great for long-term investment. They are one of the best ways to gain exposure to various stocks and sectors at a low cost.

Are index funds a better option than investing in stocks? 

Yes. Index funds invest in a portfolio of stocks. As a result, investors enjoy dual benefits of portfolio diversification and better returns which helps them minimize the overall risks.

Do index funds come with fees?

Yes, index funds have fees, but it's very nominal compared to active funds. Most index funds charge .2%, much less than active funds' which is 1% & more. 

How to check if a particular index fund is good for investment? 

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