India’s oldest index fund completes 25 years

UTI Nifty Index Fund, India’s oldest Nifty 50 index fund, turned 25 this March. 

Since its launch in 2000, it has delivered a return of 11.51%, which means a sum of ₹10 lakh invested at its launch would have grown to approximately ₹1.5 crore today. 

While this return is commendable, active large-cap funds have outperformed it over a 25-year period. The average return for the large-cap category stands at 12.39%, while UTI Large Cap Fund (formerly UTI Mastershare) has generated a return of 12.87% over the same period.

However, the trend has reversed during the past decade. Over the last 10 years, the UTI Nifty Index Fund has delivered 10.54%, slightly ahead of the large-cap category average of 10.33% and comfortably outperformed the UTI Large Cap Fund, which delivered 9.77%. 

During the past five years, the pendulum swung back towards active, with the index fund delivering a return of 15.56% compared to the large-cap category average of 16.11% and the UTI Large Cap Fund’s 14.71%.

One key factor that influenced the performance is the Securities and Exchange Board of India’s (Sebi) 2017 categorization norms. Before these rules were implemented, many actively managed large-cap funds generated alpha by taking significant exposure to mid- and small-cap stocks. With stricter mandates on stock selection, the ability of large-cap funds to outperform has reduced, making passive investing more attractive.

The UTI Nifty Index Fund has also maintained a low expense ratio, a crucial factor for long-term investors. While the regular plan has an expense ratio of 0.25%, the direct plan has an expense ratio of 0.17%. These low costs help investors retain a higher portion of their returns than actively managed funds with higher expense ratios.

Investor participation in the fund has grown over the years. Currently, the fund has 850,000 investors, while the total number of investors since inception stands at 1.25 million. However, only 2,700 investors have remained invested in the fund since the beginning, highlighting the challenges of staying the course in long-term wealth creation.

“Customers face stress, make wrong choices, and sometimes choose not to choose at all when faced with too many options. This is where the Nifty 50 index fund comes in—it is simple, diversified, easy to understand, and can get you to your destination,” said Vetri Subramaniam, chief investment officer of UTI Mutual Fund, mentioning Barry Schwartz’s book The Paradox of Choice to highlight the simplicity of index investing. 

Subramaniam also emphasized that seeking the absolute best investment strategy can sometimes be counterproductive. “Sometimes best is the enemy of good enough. The Nifty 50 index fund is good enough to get you to your destination, with a 13% return over 25 years through a systematic investment plan (SIP). It takes care of the needs part, which is a big part of what investors require,” he said.

Using a Himalayan road sign as an analogy, he compared the fund to a reliable vehicle for financial journeys. “I’m reminded of the sign that says ‘Normal Speed meets every need’. That’s what this fund does—it caters to the basic investment needs of investors. I hope 25 years from now, 50 years from now, 100 years from now, it will continue to be the barometer, changing with the times and enabling investors to reach their financial goals.”

With passive investing gaining momentum in India, the performance of the UTI Nifty Index Fund over the last decade reinforces the case for index funds as a viable long-term investment option.