The growth of India’s stock market reflects the broader progress of its economy over recent years. With GDP growth climbing steadily, retail investors are exploring options that match long-term financial goals with low-risk strategies. Among these, index funds have gained serious traction due to their cost-efficiency and broad market exposure.
But in a high-growth economy like India, do index funds still hold an edge? Let’s examine the data.
Market Performance and Index Fund Returns
The Nifty 50 ended FY25 with a moderate gain of 5.34%, despite periods of market volatility. The first half of FY25 saw a sharp rally of over 16%, driven by robust earnings in banking, auto, and capital goods. However, a 9% correction in H2FY25 dragged the overall return down.
Benchmark-oriented funds closely reflected the performance of indices like the Nifty 50 and Sensex, with only slight differences.
Given that index funds are passively managed, their performance directly corresponds to the index they track. When the overall market does well, index fund holders benefit without having to pay high management fees or rely on fund managers’ timing calls.
India’s Economic Growth & Investment Flows
India’s GDP saw a growth of 6.2% in Q3 FY25, improving from the 5.4% expansion noted in Q2. The rise was supported by manufacturing, financial services, and strong private consumption.
This macroeconomic momentum improves corporate earnings and sectoral performance, a scenario in which index funds typically thrive. Unlike actively managed funds, index funds benefit from riding this tide passively, eliminating the risk of underperformance due to poor stock-picking decisions.
In March 2025, investors pumped ₹25,082 crore into equity mutual funds, based on recent industry data. Passive schemes, especially index funds, contributed a growing chunk to this number. March saw systematic investment plans (SIPs) touch a new peak of ₹19,271 crore, underlining strong retail participation.
Passive investing is no longer a fringe strategy, it is becoming mainstream. If you’re new to investing, you should look at the best mutual funds for SIP when you are planning to invest.
Key Considerations for Investors
Although index funds are known for their ease of use and low costs, they still carry investment risks. Their returns can stagnate in sideways or bearish markets, as seen in late FY25. That said, their long-term CAGR averages between 11%–13%, making them an attractive option for those with a 5+ year investment horizon.
Also, index funds with lower tracking errors should be considered, and fund houses should have transparent rebalancing policies. Investors should also keep a tab on the news. For instance, Projections indicate that Nifty 50 companies could post a 13.2% jump in EPS for FY26, compared to a 4.6% increase in FY25. This rebound is projected to be led by BFSI, oil & gas, and infrastructure. Such news can result in traction.
With corporate profits improving and macro conditions expected to remain supportive, index funds are likely to deliver healthy returns, especially those tracking Nifty Next 50 and sectoral indices. However, research is needed before investing.
Investors with low risk appetite or those seeking diversification across sectors, without relying on a fund manager’s call, should consider index funds a core portfolio component.
Conclusion
In a growing economy like India, index mutual funds offer stability, transparency, and market-aligned returns. They may not beat the market, but they never trail far behind. As FY26 shapes up with improved earnings forecasts and continued GDP growth, index funds remain a sound option for long-term, goal-oriented investors. They are not about timing the market, they are about trusting it.
