Index Funds

Benefits of Index Funds

Index funds offer a simple and efficient way to participate in market growth. Here are some key advantages:

1. Low cost: Since index funds are passively managed, they typically have lower expense ratios compared to actively managed funds.
2. Diversification: By tracking a broad market index, these funds spread your investment across multiple companies and sectors, reducing risk.
3. Consistent performance: Index funds aim to mirror market returns, avoiding the risk of underperformance due to poor stock selection.
4. Transparency: You always know which stocks the fund holds, as they reflect the composition of the underlying index.
5. Ease of investing: Index funds are ideal for long-term, hands-off investors who want a low-maintenance way to build wealth over time.

Taxation on Index Mutual Fund

Taxation on index mutual funds in India depends on the type of index the fund tracks:

1. Equity-oriented index funds

If the index fund invests at least 90% in domestic equities (e.g., Nifty 50, Sensex):

• Short-Term Capital Gains (STCG): If units are sold within 12 months, gains are taxed at 15%.
• Long-Term Capital Gains (LTCG): If held for more than 12 months, gains above ₹1 lakh in a financial year are taxed at 10% without indexation.

2. Debt-oriented index funds

If the fund tracks a debt-based index or international index with less than 90% equity:

• Short-Term Capital Gains (STCG): Taxed as per your income slab if held for less than 36 months.
• Long-Term Capital Gains (LTCG): Taxed at 20% with indexation benefit if held for more than 36 months.

Always consult your tax advisor for personalised guidance based on your investment profile.