A Primer on Index Fund

Cautious, this post might make you fall in love with Index Funds & make you a lazy investor.

I get it, nothing beats the thrill of the current bull market. When your portfolio jumps 4-5% in a day, you feel like you would easily beat old Warren in a coke drinking competition. Trust me, it’s very hard. (Even in a coke drinking competition).

Well, I understand that the bull is raging but the bears might make a surprise comeback anytime. And as much as I love the thrill of the markets, I know I would make mistakes when the coin does not land on my side.

Also, I believe that investing in myself will garner better ROI than anything in the world. So I chose to direct my limited resource of time, stress endurance & cognitive sprints in myself. That means a limited amount of time for personal investments in stocks, debt, or other vehicles.

And thus passive investing! And thus Index Funds.

I am so convinced on Index Funds, that I would bet a Million Dollars on them.

And I quote here,

Index Funds are the new FDs

Vrushal Kapadnis

(feel my guts to write my name under it, so high on Index Funds)

The following are my notes while researching my hypothesis on Index Funds. I just want to share it with you all. I have not edited them in any manner for the post. Plain notes right from my notion. While reading these notes, please consider that I am looking for average market returns and not to be the next Warren Buffet.

Please note, this is not investment advice, please do your own research.

Just like you select the same color t-shirt for the weekdays, we should have investments as simple as this.

What is Index Fund?

An index fund tracks a benchmark like the Nifty, its portfolio will have the 50 stocks that comprise Nifty, in the same proportions.

Index fund is a mindless, lazy, passive investment vehicle in equity.

Index fund is the new FDs.

Who Invented Index Funds?

John Bogle started Vanguard 500 in 1976 after reading a Paul Samuelson article.

Returns Expected

Market Returns – Medium

Why I would invest in Index Funds?

Duration – 15-20 years

  • Diversification
  • Lower Fees (Expense Ratio of Index Fund or ETF is around 0.1 to 0.5, while for active funds is 0.5-1.5)
  • Index funds seek to match the risk and return of the market, on the theory that in the long term, the market will outperform any actively managed fund.
  • Indian ETFs – The other elephant in the room is that EPFO, India’s provident fund giant, is mandated to invest 15% of flows into equities, through Nifty and Sensex ETFs. That means the indexes and the stocks within keep getting these inflows, in the weights of the index. (from Capital Mind).
    • Nearly 7-8M new subscribers are added to EPFO every year.
    • EPFO contribution by members is nearly 2 lakh crore every year. That means 15% of the money from this contribution is added to the equity markets every year.

P.S. Study – NiftyNext50 has given returns of 17% annually from 1996 to 2017

Please note, this is not investment advice, please do your own research.


  • Tracking Error in Index ETFs & Index Mutual Funds
  • Check lowest fees
  • Say No to Dividends from Index funds, choose the Growth ones. Check the SBI-EPFO story here (Short answer – taxes)
  • ETFs have a brokerage while Funds do not. (Approx, we lose 0.1% on buy-sell value, crucial when we are rebalancing) Though there is a 0.005% stamp duty on Mutual Funds
  • ETFs might have a liquidity problem if ETFs do not hit the required popularity in India.


  • Tax for Indian Index Funds
    • For long term – 10% on profits (for gains above INR 1,00,000) + 4% cess on the tax
  • Tax for International Index Funds or ETFs
    • Before 36 months, the gains will be added to the income and taxed according to the Income Slab
    • After 36 months, the gains will be taxed at 20% with Indexation benefits

Rebalance every year

Two major tasks

  1. Analyse the Fund house or ETF and rebalance
  2. Rebalance for Tax purpose (only for Indian Index Funds)
  • Check the current weightage vs desired.
  • Check the Funds Fees, Dividends and the length you have invested in.
  • See if you need to switch funds – If the fees is getting higher than avg. If the fund issues Dividends.
  • Tax: In India Index Funds are taxed at 15% but 10% Tax if long term (more than 1 year). But any gains below 1 lakh are not taxed. So whenever you have gains around 1 lakh, withdraw or use Tax Indexation
    • Profits on the equity funds taxed at 10% Long Term Gains after one year and 15% within one year. Nasdaq 100 and debt funds taxed at 20% minus indexation after three years of holding. They are added to your income if sold before three years.
  • Ideally, the International Index funds should not be withdrawn and kept for life

Steps to Rebalance

  1. Check the total amount invested in each fund.
  2. See if the long term gains are near 1 lakh. If they are, First Buy and then Sell.
  3. Check the tracking error. If it is 10% more than the previous year, see if you want to change the ETF/Fund
  4. Check Expense Ratio, compare it with the leading Funds/ETFs. If 10% more than the previous year, see if you want to change the ETF/Fund
  5. Check if they have given out Dividends on ETFs. If they have given out significant value in dividends, it’s time to switch

Warren Buffet Bet

In 2008, Warren Buffett issued a challenge to the hedge fund industry, which in his view charged exorbitant fees that the funds’ performances couldn’t justify. Protégé Partners LLC accepted, and the two parties placed a million-dollar bet.

Buffett has won the bet, Ted Seides wrote in a Bloomberg op-ed in May. The Protégé co-founder, who left in the fund in 2015, conceded defeat ahead of the contest’s scheduled wrap-up on December 31, 2017, writing, “for all intents and purposes, the game is over. I lost.”

Buffett’s ultimately successful contention was that, including fees, costs, and expenses, an S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over 10 years. The bet pit two basic investing philosophies against each other: passive and active investing.

My Index ETFs/Funds

Please note, this is not investment advice, please do your own research.

  • Nifty 50
    NIFTYBEES (ETF) – ER- 0.08%, oldest and less tracking error
    Navi Nifty 50 Index Fund (MF) – New and lowest expense ratio – 0.06%
  • Nasdaq 100
    MON100 (ETF)- Have been investing for long in here.
    Motilal Oswal Nasdaq 100 Fund of Fund (MF)- Mutual Fund to diversify the liquidity fear
  • S&P 500
    Motilal Oswal S&P 500 Index Fund (MF) – We do not have much choice here, India does not have too many S&P Index funds
  • Nifty Next 50
    JuniorBees (ETF) – Expense ratio of 0.17 as to Average 0.3 in funds
    UTI Nifty Next 50 – ER is 0.32 and the least tracking error compared to other few options available


Out of total 100 % of the money which will go into Index funds

70% Indian Index Funds

  • 50% in Nifty 50
  • 20% in Nifty Next 50

30% International Index Funds

  • Equally divided into two Indices

Please note, this is not investment advice, please do your own research.

Why International Index Funds?

Hedge against India.

Shut Up & Wait

Just look at this chart when you feel insecure about your returns, shut up & wait.


Nasdaq 100

S&P 500

Other References

Actively Managed Funds vs Index Funds

Credits – Rachana Phadke Ranade

That’s the end of my notes. Let me know if you have fallen in love with them or not?

Also if you have any suggestions, the comment box is open.

Once again, please note, this is not investment advice, please do your own research.