Index funds have gained immense popularity among Indian investors for their simplicity, affordability, and consistent returns. With the potential for passive income and long-term wealth creation, these funds are a great choice for anyone looking to build a diversified portfolio. In this blog, we’ll explore the best index funds for passive income growth in India in 2025 and how they align with the goals of Indian investors.
As of January 2025, the Indian mutual fund industry has witnessed significant growth, with index funds playing a pivotal role in this expansion. According to the Association of Mutual Funds in India (AMFI), the total Assets Under Management (AUM) for index funds reached ₹2,73,175 crore in November 2024, up from ₹2,23,054.50 crore in April 2024, reflecting a growth of approximately 22.5%.
This surge indicates a growing preference among investors for passive investment strategies that offer market-linked returns with lower expense ratios. The increasing adoption of index funds is also attributed to their transparency, ease of understanding, and the ability to provide diversification across various sectors without the need for active management.
In the current economic landscape, India’s structural growth outlook remains strong, with signs pointing to improved growth in 2025. This positive economic environment further enhances the appeal of index funds as a viable investment option for those seeking to capitalize on the country’s economic progress.
Investors are advised to consider staggered investments in equities via Systematic Investment Plans (SIPs) or Systematic Transfer Plans (STPs) to mitigate market volatility. Incorporating hybrid, consumption, and banking funds can also provide a balanced risk-reward profile.
In the following sections, we will delve deeper into the top-performing index funds in India, their expense ratios, dividend yields, and how they can be strategically utilized to achieve passive income growth in 2025.
What are Index Funds?
Index funds are mutual funds or exchange-traded funds (ETFs) that aim to replicate the performance of a specific market index, such as the NIFTY 50, SENSEX, or NIFTY Next 50. Instead of actively selecting stocks, these funds mirror the composition of the chosen index, offering low-cost and diversified investment options.
Why Index Funds are Ideal for Indian Investors in 2025
- Low Costs:
Index funds in India have minimal expense ratios compared to actively managed funds, which means more of your money is working for you. - Diversification:
Investing in index funds spreads your money across multiple sectors and companies, reducing the risk of individual stock performance. - Ease of Investment:
Index funds are straightforward to understand and invest in, making them ideal for beginners. - Steady Passive Income:
Many index funds offer dividends, providing a steady income stream.
Key Factors to Consider When Selecting Index Funds in India
- Expense Ratio: Lower costs lead to higher net returns over time.
- Dividend Yield: Choose funds with consistent and attractive dividend payouts.
- Tracking Error: Opt for funds with minimal deviation from the index they replicate.
- Market Coverage: Decide whether you want exposure to large-cap, mid-cap, or small-cap indices.
- Fund Size: Larger funds often have better liquidity and lower operational costs.
Top Index Funds for Passive Income Growth in 2025
1. UTI NIFTY 50 Index Fund
- Overview: Tracks the NIFTY 50, representing India’s top 50 companies by market capitalization.
- Expense Ratio: ~0.20%
- Dividend Yield: ~1.5%
- Why It’s Great: Provides exposure to blue-chip companies with stable growth potential and consistent dividends.
2. HDFC Index Fund – Sensex Plan
- Overview: Mirrors the performance of the SENSEX, a benchmark index of 30 large-cap Indian companies.
- Expense Ratio: ~0.15%
- Dividend Yield: ~1.4%
- Why It’s Great: Ideal for investors looking for steady returns from India’s top-performing companies.
3. SBI NIFTY Next 50 Index Fund
- Overview: Tracks the NIFTY Next 50, comprising the next 50 largest companies after the NIFTY 50.
- Expense Ratio: ~0.25%
- Dividend Yield: ~1.6%
- Why It’s Great: Offers exposure to high-growth mid-cap companies poised to enter the NIFTY 50.
4. ICICI Prudential Bharat 22 ETF
- Overview: Tracks the Bharat 22 Index, focusing on key public sector enterprises and private sector giants.
- Expense Ratio: ~0.10%
- Dividend Yield: ~2.0%
- Why It’s Great: Diversified across sectors like finance, energy, and utilities, with a focus on dividend income.
5. Axis NIFTY 100 Index Fund
- Overview: Replicates the NIFTY 100, offering exposure to India’s top 100 companies.
- Expense Ratio: ~0.20%
- Dividend Yield: ~1.5%
- Why It’s Great: Provides a balance of stability and growth with exposure to large and mid-cap stocks.
6. Kotak NV 20 ETF
- Overview: Tracks the NV 20 Index, focused on 20 NIFTY 50 companies selected for high free-float market capitalization and liquidity.
- Expense Ratio: ~0.14%
- Dividend Yield: ~1.8%
- Why It’s Great: Combines high liquidity with a focus on high-dividend-yielding companies.
Strategies for Maximizing Passive Income from Index Funds
- Reinvest Dividends:
Use the power of compounding by reinvesting your dividends to enhance long-term returns. - Regular SIPs:
Invest systematically through a SIP (Systematic Investment Plan) to take advantage of rupee cost averaging and reduce the impact of market volatility. - Diversify:
Combine large-cap funds (like NIFTY 50) with mid-cap or sector-specific funds for a balanced portfolio. - Monitor Performance:
Keep an eye on the expense ratio and tracking error of your funds to ensure optimal performance.
Advantages of Index Funds for Indian Investors
- Cost-Effective: Lower fees ensure higher net returns.
- Market-Wide Exposure: Invest in India’s top-performing companies across various sectors.
- Tax Efficiency: Long-term capital gains from index funds are taxed at a lower rate in India.
- Ease of Access: Available through mutual fund platforms and brokers, making them accessible to everyone.
Conclusion
Index funds are a powerful tool for Indian investors seeking passive income growth in 2025. With options like the UTI NIFTY 50 Index Fund and HDFC Index Fund – Sensex Plan, you can build a diversified and cost-efficient portfolio that aligns with your financial goals.
By focusing on low expense ratios, consistent dividend yields, and market alignment, you can make informed decisions that drive long-term success. Start your journey today and let the simplicity of index funds work for you.
FAQs
What are index funds?
Index funds are mutual funds or ETFs designed to replicate the performance of a specific market index, such as NIFTY 50 or SENSEX. They offer low-cost, diversified investment options suitable for passive income and long-term growth.
Why are index funds ideal for passive income?
Index funds often distribute dividends and provide exposure to market-wide growth. They require minimal active management, making them a hassle-free option for earning steady income.
How do I choose the best index fund?
Factors to consider:
- Market segment (large-cap, mid-cap, or sector-specific indices)
- Expense ratio (lower is better)
- Tracking error (accuracy in replicating the index)
- Dividend yield
- Fund size and liquidity
Which are the top index funds in India for 2025?
Some of the best-performing index funds in India are:
- SBI NIFTY Next 50 Index Fund
- UTI NIFTY 50 Index Fund
- HDFC Index Fund – Sensex Plan
- ICICI Prudential Bharat 22 ETF
- Axis NIFTY 100 Index Fund
What is the expense ratio, and why is it important?
The expense ratio is the annual fee charged by the fund for managing your investments. Lower expense ratios mean higher net returns for investors over time.
Can index funds outperform actively managed funds?
Over the long term, index funds often outperform actively managed funds due to lower fees and consistent replication of market performance. However, they may not provide short-term outperformance during volatile markets.
What is a Systematic Investment Plan (SIP)?
A SIP allows you to invest a fixed amount periodically (e.g., monthly) in a fund. It’s a disciplined approach to investing and helps mitigate market volatility through rupee cost averaging.
Are index funds suitable for beginners?
Yes, index funds are beginner-friendly due to their simplicity, low costs, and diversified nature, making them a safe starting point for new investors.
What is tracking error, and how does it affect returns?
Tracking error measures the deviation of an index fund’s performance from its benchmark index. Lower tracking errors indicate better fund management and closer alignment with the index.
Do index funds offer dividends?
Yes, many index funds distribute dividends from the underlying stocks in the index. Funds like the ICICI Prudential Bharat 22 ETF are known for higher dividend payouts.
