7 index funds beat 20% CAGR in 3 years—but benchmark returns tell another story

But amid the growing popularity of index funds, do you know how they have performed historically? 

Here, we have taken data from the fact sheets of the respective funds for the last 3 years’ returns and found that there are 7 index funds which have generated up to 30% CAGR but have failed to beat their respective benchmarks. 

According to AMFI-Crisil Factbook 2026, index-based investments have quietly gained interest as passive funds continued to gain popularity in FY26, drawing net inflows of Rs 2.07 lakh crore—nearly four times the amount received in FY21. 

Index funds have been the primary growth engine in the passive fund sector in India. Their assets reached Rs 3.07 lakh crore at a CAGR of 74.1%, and their AUM increased from 6.2% in March 2021 to 22.4% in March 2026. Systematic participation increased in tandem with the boom, with index fund SIP AUM reaching Rs 0.46 lakh crore at a CAGR of 72.5%. 

According to the AMFI-Crisil Factbook 2026, the percentage of index funds in retail passive AUM increased from 11.5 percent in March 2021 to 55 percent in March 2026.

Best index funds in the last 3 years

The index funds below have delivered more than 20% returns.

Fund Name	3-Year Returns In %	Benchmark Returns In %	Expense Ratio (As on 31-Jul-2026)
Motilal Oswal BSE Enhanced Value Index Fund	30.33	BSE Enhanced Value Total Return Index – 32.49	0.35
UTI Nifty 500 Value 50 Index Fund	24.92	NIFTY 500 Value 50 TRI – 25.69	0.84
ICICI Prudential Nifty Auto Index Fund	22.22	Nifty Auto TRI – 23.44	0.25
Axis Nifty Smallcap 50 Index Fund	21.92	Nifty Smallcap 50 TRI – 23.04	0.34
Kotak Nifty Smallcap 50 Index Fund	21.23	Nifty Smallcap 50 Index TRI – 23.04	0.2
Aditya Birla Sun Life Nifty Smallcap 50 Index Fund	21.22	Nifty Smallcap 50 TRI – 23.04	0.41
ICICI Prudential Nifty Pharma Index Fund	20.16	Nifty Pharma TRI – 21.77	0.32

Source: Factsheet as of 31st July 2026

How should investors evaluate the performance of an index fund beyond simply comparing its returns?

Investors must first understand what the index is designed to capture. Today, passive funds track broad-market indices, market-cap segments, sectors, themes, factors and equal-weight strategies. All these indices can behave very differently.

According to Protima Dhawan, Director & Unit Head, Anand Rathi Wealth, performance should be evaluated on:

·   Returns over rolling 3, 5 and 10-year periods

·   Tracking error and consistency

·   Concentration in the top 5 and top 10 stocks

·   Sector concentration

·   Valuation compared with its own historical average

·   Drawdown and recovery during corrections

·   AUM, portfolio liquidity and fund history

·   How frequently the index is rebalanced

What level of tracking error is acceptable?

Tracking error measures how consistently the fund follows its index. 

So the lower it is, the better it is. 

Dhawan says for an established domestic broad-market equity index fund, the following level of tracking error is acceptable:

One-year tracking error	Assessment
Below 0.50%	Good
0.50% to 1.00%	Acceptable, but compare with peers
Above 1.00%	High – Should be checked carefully

SEBI’s regulatory ceiling for equity ETFs and index funds is 2% based on one-year rolling data, but this is an upper limit, not a quality benchmark. Investors should also examine tracking differences. 

If the index delivers 12% and the fund delivers 11.4%, the tracking difference is 0.6 percentage points. Tracking difference tells investors how much return they actually lost, while tracking error shows how consistent that difference was.

What causes an index fund to underperform its benchmark?

Index funds may underperform for two broad reasons. First, at the index level, there is no active management. Stocks are included or removed according to a fixed methodology and scheduled review timeline, rather than through an immediate assessment of their business performance or valuations.

As a result, weakening companies or market laggards may remain in the index until the next rebalancing, while an active fund manager can reduce or exit such positions earlier. 

Second, the index fund itself may lag its benchmark because of the expense ratio, cash held for redemptions, delays in investing fresh inflows, transaction and rebalancing costs, dividend-reinvestment delays, and the difficulty of buying less-liquid securities at their exact index weights.

What affects index fund returns beyond expense ratio?

For index funds, costs should be kept to a minimum because there is no active stock selection or fund-manager strategy involved. 

If investors are comfortable investing on their own, they should prefer the direct plan rather than the regular plan, as the latter includes distribution costs that can unnecessarily reduce returns. 

The second check is the expense ratio; investors should compare funds tracking the same index and avoid selecting one that charges at the higher end of the category. 

Thus, choosing the direct plan and checking the expense ratio are the two key cost checks for an index fund investor.

What risks should investors assess in index funds?

Passive investing doesn’t automatically mean low-risk investing. An index fund still carries the risks of the index it tracks. 

So, take a look at market risk, valuations, how concentrated the index is in its biggest stocks and sectors, and how the index is built and rebalanced. A market-cap-weighted index can end up heavily invested in stocks that have already climbed a lot, while thematic or sector-focused indexes may be even more concentrated. 

It’s also worth checking the liquidity of the underlying securities, tracking risk, and, for ETFs, trading volume and how closely the market price matches the NAV.

Should investors continue SIPs in index funds during market downturns, or wait for valuations to become more attractive?

If you are investing through an SIP in such a fund, you may consider stopping future installments and redirecting them to a diversified actively managed fund. Index funds must invest in the companies and proportions set by the index. 

They cannot reduce their holdings quickly when a company’s business weakens, its share price becomes too expensive or better opportunities appear. 

Active fund managers have more flexibility. They can reduce weaker investments, avoid excessive concentration and choose stocks based on research and judgment.

“Depending on the fund category we have seen, 48% to 58% of active funds performed better than the Nifty 50. The average additional return over the Nifty 50 ranged from 0.25% for thematic funds to 5.24% for small-cap funds,” commented Dhawan. 

“Among the funds that outperformed, the average additional return was especially high in small-cap funds at 17.19%, mid-cap funds at 11.95%, contra funds at 10.89% and multi-cap funds at 10.78%,” Dhawan further added. 

This suggests that skilled active fund management may add value over a complete market cycle.

SIPs should be continued, especially during market downturns, because lower market levels allow investors to accumulate more units with the same instalment, improving rupee-cost averaging. 

Stopping an SIP after a fall means giving up the opportunity to invest at lower prices. 

“Our study of historical market cycles shows that investors who remained invested and continued their SIPs through corrections had a higher probability of seeing their portfolios recover over the following five years than those who exited or paused their investments,” stated Dhawan.  

During corrections, the focus should therefore be on maintaining investment discipline and ensuring that the chosen fund remains suitable, rather than trying to predict the market bottom or waiting for valuations to become more attractive.

When does an index become expensive or highly concentrated? 

An investor should first ensure that the portfolio does not become over-concentrated in index funds. The fundamental limitation of an index fund is that it is designed to replicate the index, rather than generate alpha. 

Portfolio changes take place according to predetermined index reviews, rather than when company fundamentals, valuations or market conditions require action. As a result, laggards may remain in the portfolio until the next rebalancing, while emerging outperformers may enter only after a substantial rise in their market capitalization and share price. 

Investors can therefore lose flexibility at both ends. Instead of continuously adding to index funds, they should consider diversified actively managed funds, where the manager can respond to changing opportunities and risks. 

“Diversification across market capitalisations is equally important. At a portfolio level, around 55% of the equity allocation can be maintained in large-cap funds, with the remaining 45% divided between mid-cap and small-cap funds according to the investor’s risk profile,” recommended Dhawan. 

Which type of investor is best suited to index funds, and who may benefit more from actively managed funds?

Index funds are not suitable for every investor. 

A first-time investor who is unfamiliar with equity markets and is beginning with a small portfolio may explore a broad-market index fund as a simple starting point. 

In fact, investors seeking to avoid fund manager risk may choose to include an index fund in their portfolio.

“For instance, a portfolio of less than Rs 1 lakh can initially use an index fund, provided the investor monitors the underlying market-cap exposure and avoids narrow, thematic or highly concentrated indices. However, as the portfolio grows and the investment horizon becomes longer, the focus should shift towards diversified actively managed funds,” stated Dhawan.

Categories such as large-cap, flexi-cap, multi-cap, mid-cap and small-cap funds allow investors to diversify across companies, sectors and market capitalisations, while benefiting from active research and portfolio rebalancing. 

Disclaimer: This article is for informational purposes only and should not be construed as investment, financial, tax, or legal advice. Any illustrations, examples, or return projections used in this article are for explanatory purposes only and do not guarantee actual investment outcomes. The views and opinions expressed by experts quoted in this article are their own and should not be considered investment recommendations. Readers should consult a qualified professional before making any financial decisions. 

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