Index funds have become a popular choice for investors over the past few years. According to a report, index fund folios surged 13 times over September 2021 to September 2025. Low expenses, easy investing, and stable long-term returns—these three factors have made them increasingly popular. The truth, however, is that 3-year, 5-year, and 10-year charts tell three completely different stories.
The winners vary — smallcaps shine, midcaps show balanced gains, and largecaps emerge as the true champions of compounding over the long term.
What are index funds?
An index fund is a mutual fund that follows a market index—such as the Nifty 50, Nifty Next 50, Nifty Midcap 150, and Nifty Smallcap 250. There’s no stock-picking involved. The fund follows the market’s movements and their expense ratio is low. They are considered highly stable over the long term. However, since each index has different behavior and risk profiles, their performance also varies over time.
3-year chart: Small-cap and Mid-cap stocks are at a high pace, with thematic funds also dominating
Top 5 index funds (3-year returns)
- Motilal Oswal BSE Enhanced Value Index – 33.29%
- ICICI Prudential Nifty Auto Index – 28.96%
- Axis Nifty Midcap 50 Index – 25.82%
- ABSL Nifty Smallcap 50 Index – 25.45%
- Axis Nifty Smallcap 50 Index – 25.42%
This timeframe clearly shows that smallcaps, midcaps, and thematic indices have best captured the market momentum. In the short term, the categories that typically gain momentum are those with the highest risk.
5-year chart: Maturity of midcaps and the rise of equal-weight indices
Top 5 index funds (5-year returns)
- Motilal Oswal Nifty Midcap 150 Index – 25.63%
- Motilal Oswal Nifty Smallcap 250 Index – 25.29%
- Nippon India Nifty Smallcap 250 Index – 24.95%
- DSP Nifty 50 Equal Weight Index – 20.71%
- Sundaram Nifty 100 Equal Weight Index – 19.20%
Midcaps delivered the strongest and most consistent performance here, while smallcaps also remained in the top spot. Interestingly, equal-weight indices (where each stock receives equal weighting) also appeared among the top performers. This clearly indicates that market growth wasn’t solely driven by large stocks; broader participation was also evident.
10-year chart: Largecaps’ simplicity and compounding win
Top index funds (10-year returns)
LIC MF Nifty Next 50 Index – 13.95%
ICICI Prudential Nifty Next 50 Index – 13.95%
Bandhan Nifty 50 Index – 13.91%
UTI Nifty 50 Index – 13.84%
HDFC Nifty 50 Index – 13.77%
Tata Nifty 50 Index – 13.74%
This clearly indicates that the most reliable long-term returns are those that fall less in crashes and recover faster—namely, the Nifty 50 and Nifty Next 50.
Market Cyclicity: Why doesn’t one index win all the time?
Three different timeframes say the same thing:
-Markets always move in cycles, and each cycle has a different hero.
-When liquidity and optimism increase, smallcaps and thematic indices outperform.
-When the market is balanced, midcaps and equal-weight indices shine.
-When the entire economic cycle is complete, largecaps offer the most compounding.
-That is, choosing an index based solely on recent returns can be risky.
Investor takeaway: Who should choose which index?
This story conveys a clear message – the best index fund is the one that matches your time horizon and risk appetite.
3–5 years: midcap/selective smallcap indices
5–7 years: equal-weight + broader diversified indices
10+ years: largecap indices like the Nifty 50 and Nifty Next 50.
Disclaimer: The above content is for informational purposes only. Mutual Fund investments are subject to market risks. Please consult your financial advisor before investing.