3 days ago
Index Funds Top 20% Returns, Yet Trail Benchmarks
Index funds buy the same kinds of investments as a market index.
Seven funds made more than 20% over the past three years.
However, each one earned less than the index it was designed to follow.
This gap can come from fees, trading costs, cash holdings and delays in buying investments.
Investors should also check how closely a fund follows its index.
A fund can be risky if its index is heavily concentrated in a few companies or sectors.
One expert says active funds may do better because managers can change investments more quickly.
The article also says continuing SIP investments during market falls can help investors buy more units at lower prices.
Seven Indian index funds delivered between 20.16% and 30.33% over three years but underperformed their respective benchmarks.
Motilal Oswal BSE Enhanced Value Index Fund led the group with 30.33%, versus 32.49% for its benchmark.
Index-fund net inflows reached Rs 2.07 lakh crore in FY26, while index-fund assets rose to Rs 3.07 lakh crore.
Experts recommend checking rolling returns, tracking error, concentration, valuations, liquidity, costs and rebalancing frequency.
The article presents differing views on SIPs during downturns, contrasting active-fund flexibility with the benefits of continuing disciplined investments.
- Who
- Seven Indian index funds, investors and Protima Dhawan of Anand Rathi Wealth are central to the article.
- What
- The article compares the funds’ three-year returns with their benchmarks and explains how investors should assess index funds.
- Where
- India.
- When
- The return data comes from fund factsheets dated 31 July 2026; broader industry figures cover FY26 and March 2026.
- Why
- The funds produced strong absolute returns but still lagged their benchmarks, highlighting the need to assess tracking, costs, concentration and risk.
Continue SIPs and Maintain Discipline
Consider Active Funds During Weakness
Response to market downturns
Continue SIPs and Maintain Discipline
The article says investors should generally continue SIPs during downturns because lower prices allow them to accumulate more units and may improve rupee-cost averaging.
Consider Active Funds During Weakness
The article also quotes Protima Dhawan suggesting that investors may stop future index-fund installments and redirect them to diversified active funds when valuations or fund suitability are concerns.
Flexibility and fund selection
Continue SIPs and Maintain Discipline
Index funds offer a simple, low-cost approach and can suit first-time investors or those seeking to avoid fund-manager risk.
Consider Active Funds During Weakness
Active managers can reduce weaker holdings, avoid excessive concentration and respond to changing business conditions more quickly than an index methodology.
Evidence on active management
Continue SIPs and Maintain Discipline
The article emphasizes that staying invested and continuing SIPs through corrections historically gave investors a higher probability of recovery over the following five years.
Consider Active Funds During Weakness
Dhawan said 48%-58% of active funds, depending on category, outperformed the Nifty 50, with reported average additional returns ranging from 0.25% to 5.24%.
Key facts
- Top fund return
- Motilal Oswal BSE Enhanced Value Index Fund returned 30.33% over three years.
- Largest benchmark gap
- The seven listed funds all trailed their benchmarks; the largest stated gap was 2.16 percentage points for the Aditya Birla Sun Life Nifty Smallcap 50 Index Fund.
- FY26 net inflows
- Index-based investments received Rs 2.07 lakh crore in net inflows.
- Index-fund assets
- Index-fund assets reached Rs 3.07 lakh crore, growing at a reported 74.1% CAGR.
- Retail passive AUM share
- Index funds’ share of retail passive AUM rose from 11.5% in March 2021 to 55% in March 2026.
- Tracking-error guide
- For an established domestic broad-market equity index fund, one-year tracking error below 0.50% was described as good; 0.50%-1.00% as acceptable; and above 1.00% as high.
- Regulatory ceiling
- The Securities and Exchange Board of India’s stated ceiling for equity ETFs and index funds is 2% on one-year rolling tracking error.
Quotes
Protima Dhawan
Director and Unit Head at Anand Rathi Wealth
“For instance, a portfolio of less than Rs 1 lakh can initially use an index fund, provided the investor monitors the underlying market-cap exposure and avoids narrow, thematic or highly concentrated indices. However, as the portfolio grows and the investment horizon becomes longer, the focus should shift towards diversified actively managed funds.”
financialexpress.com
“Our study of historical market cycles shows that investors who remained invested and continued their SIPs through corrections had a higher probability of seeing their portfolios recover over the following five years than those who exited or paused their investments.”
financialexpress.com
Sources
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