These five index funds beat their indices! Why you should avoid them!

Last Updated on

Here are five index funds based on Sensex and the Nifty that have beat their indices in the last year! Therefore, investors should avoid such funds! Since an index fund has expenses associated with management and commissions (in the regular plan), it is impossible for an index fund to produce a return more than the index that it is tracking. However, this is sometimes possible.

If the portfolio of the index fund has stock weights that differ from the index for an extended period, the index fund will produce a return that is higher (or significantly lower) than the total returns index return (if we include dividends).

While this can happen just from fund management inefficiency, a large inflow or outflow of money from the index can cause. Therefore, index funds with a small AUM  are especially vulnerable to such deviations.


These five index funds beat their indices! Why you should avoid them!


I was trying to check if there is any correlation between expense ratio and return from the list of large cap funds tracking the Sensex and Nifty.  I was shocked to find a huge spread in returns! Here is the full list.Source Value Research

list of large cap index funds with expense ratio and one year trailing returns

First, Nifty and Sensex returns are nearly the same and for the one year trailing return period considered (6th Feb 2018 to 6th Feb 2019), NiFTY TRI return was 6.93%. Now, notice the return from the funds marked in red.

The HDFC Sensex fund marked in yellow is an exception as the AMC merged its Sensex plus plan with its Sensex fund. The Sensex plus plan was actively managed to a small extent and hence the extra return in this case can be excused.

A 2-2.5% excess return over the benchmark is extremely unhealthy for an index fund. This essentially means that the fund manager did not or could not keep track the index efficiently. The most likely reason for this is clear enough if we inspect the AUM.

Five index funds beat their indices in the past year

FundExpense Ratio (%)1-Year Return (%)Net Assets (Cr)
Tata Index Sensex Fund – Direct Plan0.169.49.01
Reliance Index Fund – Sensex Plan – Direct Plan0.299.0612.87
ICICI Prudential Sensex Index Fund – Direct Plan0.248.569.95
LIC MF Index-Sensex Plan – Direct Plan1.038.4819.7
Taurus Nifty Index Fund – Direct Plan1.177.857.07
Tata Index Nifty Fund – Direct Plan0.116.9214.43
HDFC Index Fund Nifty 50 Plan – Direct Plan0.16.82534.4
IDFC Nifty Fund – Direct Plan0.176.66139.4
UTI Nifty Index Fund – Direct Plan0.136.641076.28
Reliance Index Fund – Nifty Plan – Direct Plan0.296.57137.23
SBI Nifty Index Fund – Direct Plan0.256.49342.19
IDBI Nifty Index Fund – Direct Plan0.26.42220.79
ICICI Prudential Nifty Index Fund – Direct Plan0.326.19365.17
Franklin India Index Fund – NSE Nifty Plan – Direct Plan0.75.97249.72
LIC MF Index-Nifty Plan – Direct Plan0.645.4523.64

Among these, the fund marked in red, namely:  Tata Index Sensex Fund, Reliance Index Fund – Sensex Plan, ICICI Prudential Sensex Index Fund, LIC MF Index-Sensex Plan, Taurus Nifty Index Fund,  Tata Index Nifty Fund have an AUM well below 100 crores. At this such low levels, inflows or outflows can make the funds portfolio deviation from that of the index resuling in a higher (or lower) return,

Expene ratio vs trailing return

If the expense ratio of the remaining funds and their last one year trailing retuns are plotted, it is comforting to see that higher the expense ratio, lower the return – as it should be.

expense ratio of direct plan index funds vs their last one year trailing returns

What should index investors do? How to choose an index fund?

Investors wanting to build a passive equity portfolio should not just consider the expense ratio. They should avoid low AUM funds and stick to funds with as high an AUM as possible. In fact, a higher AUM (at least 100+ crores) should be first filter for selection.

In this report we have only considered Sensex and Nifty index funds. Other index funds tracking Nifty Next 50, Nifty 50 Equal Weight and Nifty 100 Equal Weight should also be prone to such errors as many of them do not have a large AUM. Therefore investors should be wary of performance.

Do share if you found this useful

About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Content Policy

Freefincal has original unbiased, conflict-of-interest-free,  topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.  It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.


  1. Might be a stupid to question to ask, but could those fund houses in red have pocketed the extra % and kept the returns slightly lower than Index TRI?
    I am guessing being under SEBI’s watch would prevent them from doing that.

  2. “At this such low levels, inflows or outflows can make the funds portfolio deviation from that of the index resuling in a higher (or lower) return,”

    Could you please elaborate the above point (of low AUM) with a small example? Thanks for the great work btw.

Leave a Reply

Your email address will not be published. Required fields are marked *