What is the Index Fund?
An index fund simply holds every stock in an index like the Nifty 50 in the same proportion. There is no fund manager trying to beat the market, so costs are minimal — typically 0.1–0.3% versus 1.5–2.2% for active funds.
That gap looks trivial and is not. Over 20 years, a 1.5% higher expense ratio can consume 25–30% of your final corpus, which is why index funds beat most active funds over long periods without any stock-picking skill.
Formula & worked example
Fees come straight off the return, then compound against you:
Value = Σ (SIP compounded at net return)
Worked example: ₹15,000/month plus ₹1,00,000 upfront for 20 years at 12% with a 0.2% expense ratio → about ₹1.56 crore. The 0.2% fee itself costs roughly ₹4.4 lakh over the period. Had the fee been 1.7% (a typical active fund), the drag would be several times larger.
How to use this index fund calculator
- Enter your monthly SIP and any starting lumpsum.
- Use 11–12% for Nifty 50 long-term; lower if you are modelling a global or debt index.
- Enter the fund's actual expense ratio — it is on every factsheet.
- Read "Lost to Expense Ratio" to see the fee in rupees rather than as an abstract percentage.
Smart tips
- Compare expense ratios directly. Between two Nifty 50 index funds, the cheaper one wins almost by definition — they hold identical stocks.
- Direct plans have lower expense ratios than regular plans. Over 20 years the difference is often 15–20% of the corpus.
- Also check tracking error — a fund that lags its index by 0.5% is as costly as a 0.5% higher fee.
- Index investing only works with discipline. The strategy fails if you stop SIPs during the crashes it depends on.
Frequently asked questions
Are index funds better than active funds?
Over 10+ years, the majority of active large-cap funds fail to beat their index after fees. Index funds guarantee the market return minus a very small cost.
What is a good expense ratio for an index fund?
Under 0.3% is competitive; the cheapest Nifty 50 funds sit near 0.1%. Anything above 0.5% for a plain index fund is expensive.
Which index should I choose?
Nifty 50 or Sensex for core large-cap exposure. Nifty Next 50 adds mid-cap tilt with more volatility. Adding a global index fund improves diversification.
Do index funds pay dividends?
Growth options reinvest automatically, which is the usual choice. IDCW options pay out but are taxed at your slab rate and interrupt compounding.
Want the theory behind the numbers? Read our index fund guides on the Money Blog.
Written by Gurjeet Singh, Sharpen Solutions. Last reviewed 30 Sep 2026. How we check these numbers.