UTI Nifty Index Fund Completes 25 Years, Reinforcing the Strength of Passive Investing

A ₹10 Lakh Investment in 2000 Would Be Worth ₹1.5 Crore Today

India’s oldest Nifty 50 index fund, the UTI Nifty Index Fund, marked its 25th anniversary this March. Launched in 2000, the fund has delivered a compounded annual return (CAGR) of 11.51%, meaning that an investment of ₹10 lakh at inception would have grown to approximately ₹1.5 crore today.

Despite its steady growth, active large-cap mutual funds have historically outperformed index funds over long periods. The average return for large-cap funds over the last 25 years stands at 12.39%, while the UTI Large Cap Fund (formerly UTI Mastershare) has delivered 12.87% over the same period.

Passive vs. Active Investing: Shifting Performance Trends

While active funds led the way for years, the trend has shifted in favor of passive investing over the last decade.

• Over the past 10 years, the UTI Nifty Index Fund generated 10.54%, slightly ahead of the large-cap fund category average of 10.33%.
• The fund also outperformed the UTI Large Cap Fund, which delivered 9.77% during this period.
• However, in the last five years, active funds regained an edge. The UTI Nifty Index Fund delivered 15.56%, while the large-cap fund category average stood at 16.11% and the UTI Large Cap Fund returned 14.71%.

Impact of SEBI’s Categorization Norms on Fund Performance

One key factor influencing the performance of active funds was the Securities and Exchange Board of India’s (SEBI) 2017 fund categorization norms.

Before these rules were enforced, many actively managed large-cap funds outperformed by investing in mid- and small-cap stocks, boosting their overall returns. However, SEBI’s stricter mandates on stock selection reduced this flexibility, making it harder for active large-cap funds to consistently generate alpha (excess returns over the benchmark index).

As a result, passive index funds like the UTI Nifty Index Fund became more attractive to investors looking for lower costs and stable long-term returns.

Low Expense Ratio: A Key Advantage for Investors

A significant reason why index funds have gained popularity is their low expense ratio compared to actively managed funds.

• The UTI Nifty Index Fund’s regular plan has an expense ratio of just 0.25%.
• The direct plan, which is preferred by experienced investors, has an even lower expense ratio of 0.17%.

This cost advantage ensures that a larger portion of returns is passed on to investors rather than being eroded by fund management fees. In contrast, actively managed funds typically have expense ratios between 1-2%, which can significantly impact long-term wealth accumulation.

Investor Participation and Long-Term Wealth Creation Challenges

Investor participation in the UTI Nifty Index Fund has grown significantly over the years:

• The fund currently has 850,000 investors, with a total investor count of 1.25 million since inception.
• However, only 2,700 investors have remained invested since the fund’s launch in 2000, indicating that staying the course for long-term wealth creation remains a challenge for most investors.

Financial experts often emphasize patience and discipline in investing, particularly in index funds, where long-term compounding plays a crucial role.

Why Index Funds Are Gaining Popularity in India

Subramaniam, a senior executive at UTI Mutual Fund, highlighted the simplicity and reliability of Nifty 50 index funds, stating:

“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.”

He further 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.”

Passive Investing: A Growing Trend in India

The increasing popularity of index funds and exchange-traded funds (ETFs) in India mirrors global trends, where passive investing has steadily gained traction due to:

• Lower fees compared to active funds
• Consistent performance tracking broad market indices
• Lower risk of underperformance due to fund manager errors
• Ease of investment and transparency

Using an analogy, Subramaniam compared the UTI Nifty Index 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.”

Outlook: The Future of Index Funds in India

With increasing awareness about passive investing, the success of the UTI Nifty Index Fund over the past 25 years reinforces the potential of index funds as a viable long-term wealth creation tool.

As India’s stock market matures and investor education improves, index funds are expected to play an even greater role in portfolio diversification and risk management.

For investors looking for a hassle-free, low-cost, and long-term investment strategy, Nifty 50 index funds continue to be a compelling option—offering a simple yet effective way to build wealth over time.