NetReturns

Beginner guide · 4-minute read

Index funds and ETFs, explained simply

An index fund simply copies a market index like the Nifty 50, holding the same companies in the same proportions. No manager picks stocks, so fees are low.

Checked on 14 Oct 2026 against SEBI's mutual fund rules and the Finance Act, 2026.

In one minute

What it holds
Whatever the index holds. The Nifty 50 is India's 50 largest listed companies.
Costs
Usually among the lowest fees of any mutual fund.
ETFs
The same idea, but bought and sold on the stock exchange like shares, which needs a demat account.
Tax
Same as equity funds: 12.5% on long-term gains above ₹1.25 lakh a year.

How it works, with real numbers

₹10,000 a month for 15 years in a Nifty 50 index fund is ₹18,00,000 of your money. At 12% a year (the middle of our 10–14% planning range), you'd keep about ₹43,90,349 after tax.

Because the fund just follows the index, its return is the index's return minus a small fee. It won't beat the market, but it won't trail it by much either.

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Pros and cons

Good things

  • Low cost. Fees are a fraction of most actively managed funds.
  • No manager risk. You get the market's return, not one person's picks.
  • Simple and transparent. You always know what it holds.
  • Tax like equity funds. 12.5% above ₹1.25 lakh of long-term gains a year.

Things to watch

  • Falls with the market. There's no manager to step aside in a crash.
  • Can't beat the index. By design, you get the index minus the fee.
  • Tracking error. Small gaps between the fund and the index.
  • ETFs need a demat account. And some trade thinly, so prices can be off.

Is it right for you?

A good fit if you…

  • want a low-cost core holding for the long term
  • don't want to pick fund managers

Not a good fit if you…

  • need the money within a few years
  • want someone to actively manage risk for you

Mistakes to avoid

  • Comparing only returns. Between two funds on the same index, the lower fee and smaller tracking error usually win.
  • Buying ETFs with thin trading. Check that the ETF trades enough every day.

Words you'll see

Index
A list of companies used to measure the market, like the Nifty 50.
Tracking error
How far the fund's return drifts from the index.
ETF
Exchange-traded fund: an index fund you buy and sell on the stock exchange.
Demat account
An account that holds shares and ETFs electronically.
NAV
Net asset value: the price of one unit of the fund on a given day.
Units
What you own in a fund; your money buys units at the day's NAV.
Expense ratio
The fund's yearly fee, taken out of the fund before returns reach you.
Try it with your own numbersSee the tax, what you keep, and how it compares with other options.
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This guide explains how things work. It is not advice on what you should invest in. NetReturns is not SEBI-registered.

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