Nifty 50 Index Fund
A Nifty 50 index fund aims to hold the fifty companies in the Nifty 50, in the weights the index gives them. It does not pick stocks. The fund manager’s job is to track the index rather than beat it, and the fund is judged on how closely it manages that.
Because the rules force every such fund to hold nearly the same thing, the interesting question is not what they hold. It is why two funds tracking one index end up with different returns, and where you can look that difference up.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and Specialised Investment Fund distributor, ARN-194216, and a distributor of portfolio management services registered with APMI, APRN10201. We do not run any scheme and we name none on this page. The choice is yours.
What a Nifty 50 index fund holds
Ninety-five per cent, at least. SEBI’s Master Circular for Mutual Funds sets the floor for every index fund and exchange traded fund: “Minimum investment in securities of a particular index (which is being replicated/ tracked)- 95% of total assets”. The remaining five per cent covers cash and the mechanics of running the fund.
The index itself is built by NSE Indices. The Nifty 50 methodology describes “a 50 stock, float-adjusted market-capitalization weighted index”, trading since April 1996. Float-adjusted means only the shares actually available to trade are counted, so a company whose promoters hold most of the stock carries less weight than its headline size suggests.
The fifty names are not fixed. NSE Indices reviews the index twice a year, on six months of data ending January and July, and any replacements take effect from the last trading day of March and September. Four weeks’ notice is given before a change.
| Stocks in the index | 50 |
| Weighting | Float-adjusted market capitalisation |
| Review | Twice a year, on data ending January and July |
| Scheduled changes effective | Last trading day of March and September |
| Notice before a change | Four weeks |
| Minimum the fund must hold in index stocks | 95% of total assets |
When the index changes, the fund has to follow. SEBI requires the portfolio of an equity index fund to be rebalanced after a change in index constituents arising from a periodic review. That trade happens on a day the whole market knows about in advance, which is one of the places the fund’s return can drift from the index’s.
Tracking error and tracking difference are not the same thing
Two different measurements, and most explanations treat them as one. SEBI defines both separately in the same clause of the Master Circular, requires both to be published, and sets different limits depending on the type of index fund. Confusing the two is the most common mistake made about index funds.
Tracking error is the “Annualized standard deviation of the difference in daily returns between the underlying index or goods and the NAV” of the fund, measured on rolling data for the past one year. It describes how consistent the gap is from day to day.
Tracking difference is “the annualized difference of daily returns between the index or goods and the NAV” of the fund. It describes how large the gap is.
A fund can lag the index by the same amount every single day. That fund has a very low tracking error, because the gap never varies, and a real tracking difference, because the gap is always there. Tracking error alone would make it look excellent.
| Tracking error | Tracking difference | |
|---|---|---|
| What it measures | How much the daily gap varies | How far the fund ends up behind or ahead |
| How it is calculated | Annualised standard deviation of daily return differences | Annualised difference of daily returns |
| Published | Daily | Monthly |
| Periods shown | Rolling one year | 1, 3, 5 and 10 years, and since allotment |
| Limit in the circular | 2% For index funds other than debt ones |
1.25% One-year average, for debt index funds only |
The number SEBI caps is not the number that costs you
Two per cent, on tracking error only. SEBI’s Master Circular states that “For ETFs/ Index Funds (other than Debt ETFs/ Index Funds), Tracking Error shall not exceed 2%”. Where force majeure beyond the AMC’s control pushes it higher, the AMC may exceed the limit but must report it to the trustees along with corrective action.
The clause sets a tracking difference limit as well, but only for debt funds: “the annualized tracking difference averaged over one-year period shall not exceed 1.25%”, again with a reporting duty to the trustees if it is breached. No corresponding tracking difference figure is set for equity index funds in that clause.
So for a Nifty 50 index fund, the limit guards against erratic tracking rather than against persistent lag. A fund sitting comfortably inside the two per cent tracking error limit can still have trailed its index over several years. That is why the monthly number deserves more attention than the daily one if you plan to hold for a long period.
Where to check the numbers yourself
AMFI and the fund house’s own website, on the schedule SEBI sets. Tracking error goes up daily for every index fund and exchange traded fund, debt ones included. Tracking difference goes up monthly, with separate figures for one, three, five and ten years and since the scheme was allotted.
That multi-period disclosure is the useful part. A single year’s tracking difference can be distorted by one bad week. The same fund measured over five years and since allotment tells you whether the gap is a pattern or an accident.
Two more things change the gap, and both are visible before you invest.
The expense ratio comes out of the fund’s assets, so it feeds straight into the difference between the index and the fund’s net asset value. Index funds tracking the same index do not all charge the same, and the figure is published in each scheme’s documents.
Exit load is charged when you leave. SEBI’s Mutual Funds Regulations 2026 provide that “The exit load of an open-ended mutual fund scheme shall not exceed three per cent of the Net Asset Value of the scheme”. Many index funds charge nothing, some charge for an early exit, and the scheme document states which
What separates one index fund from another
Three hundred and seventy-six index funds were running in India at the end of September 2026, and 277 of them were equity index funds. AMFI’s monthly data puts their assets at ₹2,39,806.84 crore across 1,57,35,616 folios, out of ₹3,20,457.99 crore for index funds as a whole.
| Category | Schemes | Folios | Net assets (₹ crore) |
|---|---|---|---|
| Equity index funds | 277 | 1,57,35,616 | 2,39,806.84 |
| All index funds | 376 | 1,59,40,167 | 3,20,457.99 |
Figures are presented as supplied for 30 September 2026.
Source: AMFI monthly data, September 2026.
Two hundred and seventy-seven is a large number for a category defined by not choosing. Since the 95% rule pushes every fund tracking a given index towards that index’s own portfolio, two funds following the same index cannot distinguish themselves on holdings. What is left to separate them is cost, how cleanly they trade around index changes, and how much cash they carry.
That is a narrower set of differences than most fund categories offer, and it is why the published tracking numbers do most of the work here. Where an actively managed scheme is judged on the manager’s choices, a Nifty 50 index fund is judged on execution. The broader map of categories is set out in types of mutual funds, and the same index can also be held through an exchange traded fund, which trades on the exchange rather than at the day’s NAV.
Tax on a Nifty 50 index fund
Equity rates apply to a fund that meets the statutory equity test. Section 198 of the Income-tax Act 2025 sets that test at 65% of total proceeds in the equity shares of domestic listed companies, measured as an annual average rather than on any single day.
The statutory wording in Section 198 requires “a minimum of 65% of the total proceeds of such fund is invested in the equity shares” of domestic companies listed on a recognised stock exchange. How that percentage is worked out matters: sub-section (8) says it “shall be computed with reference to the annual average of the monthly averages of the opening and closing figures”.
A Nifty 50 index fund tracks an index made up of domestic listed equity shares, so it would ordinarily be expected to meet the test. SEBI’s 95% rule is a separate requirement about asset allocation and does not by itself settle the tax classification. The scheme’s own documents state its position.
Two rates follow, both conditional on securities transaction tax having been paid.
Short-term gains are taxed at 20%. Section 196 covers “Tax on short-term capital gains in certain cases” and sets “income-tax calculated on such short-term capital gains at the rate of 20%” on a unit of an equity oriented fund where the sale is chargeable to securities transaction tax.
Long-term gains are taxed at 12.5% above ₹1,25,000. Section 198 charges “income-tax calculated on such long-term capital gains exceeding ₹ 125000 at the rate of 12.5%”.
The holding period that decides which rate applies, and how the exemption threshold works across your whole portfolio, are covered on short-term capital gain tax on mutual funds and long-term capital gain tax on mutual funds. We are not tax advisers; confirm your own position with a chartered accountant.
What changed on 1 April 2026
A new rulebook took over. The SEBI (Mutual Funds) Regulations, 2026 came into force that day, with regulation 1(2) stating that “These regulations shall come into force with effect from April 1, 2026”. They were last amended on 7 July 2026.
This matters when you read about index funds elsewhere. A large number of pages still cite the 1996 regulations and their numbering, so a regulation number quoted in an older article may no longer point where it says it does. Where a figure here comes from a rule, the rule is linked so you can check it at source.
The operating requirements described above — the 95% floor, the two per cent tracking error cap, the daily and monthly disclosure — sit in SEBI’s Master Circular for Mutual Funds dated 20 March 2026, which consolidates the circulars in force.
Common Questions
A mutual fund scheme that holds the fifty companies in the Nifty 50 in the index’s own weights, rather than selecting stocks. SEBI requires at least 95% of total assets to sit in the index’s securities. The fund aims to match the index’s return, not to exceed it.
No. They hold nearly the same portfolio, but costs, cash levels and trading around index changes differ. That gap shows up as tracking difference, which every fund publishes monthly on its own website and on AMFI’s.
Tracking error measures how much the daily gap between fund and index varies, and is published daily. Tracking difference measures how large that gap is over a period, and is published monthly. A fund can have low tracking error and still trail the index.
Not in the clause that sets the limits. SEBI caps tracking error at 2% for index funds other than debt ones, and caps the one-year average tracking difference at 1.25% for debt index funds only. No equivalent tracking difference figure is set there for equity index funds.
NSE Indices reviews the index twice a year on data for the six months ending January and July. Any replacements take effect from the last trading day of March and September, with four weeks’ notice beforehand.
At equity rates, where the fund meets the 65% equity test in Section 198 of the Income-tax Act 2025, which is measured as an annual average of monthly averages rather than on one date. Short-term gains are then charged at 20% under Section 196, and long-term gains at 12.5% on the amount above ₹1,25,000, where securities transaction tax has been paid.
On the AMC’s website and on AMFI’s, under the schedule SEBI sets. Tracking error appears daily. Tracking difference appears monthly, shown for one, three, five and ten years and since the scheme was allotted.
Both track an index and both face the 95% rule. An index fund is bought and sold at the day’s net asset value through the fund house. An exchange traded fund trades on the stock exchange during market hours at whatever price buyers and sellers agree.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.