A Simple Guide to Build a Portfolio Using Index Funds

WealthBasketNov 30, 2023

Are you Interested in building a hassle-free, hands-off investment portfolio in India, utilizing only index funds?

You bet! Passive investing is on the rise, and there’s a wide array of choices for investors.

But when you have so many options, how can you construct this kind of portfolio? In this blog, we’ll provide you with a step-by-step guide on crafting a portfolio with index funds.

A Step-by-Step Manual for Building Portfolio Using Index Funds

Follow these steps to build your portfolio using index funds:

1. Clearly Define Your Financial Goal

Before you simply react to market news and buy an index fund, it’s important to establish your financial goals. Clearly define what you’re aiming for. Are you thinking short-term or long-term? For example, are you saving for a car in two years or planning for your retirement? 

For those with long-term financial goals, an index fund is the perfect match.

2. Dive Deep into Index Fund Research

When you’re looking into an index fund, it’s essential to consider various factors. Here are some key points to remember:

  • Market Capitalization 

Index funds can mirror the performance of small, medium, or large companies, often referred to as small-cap, mid-cap, or large-cap indexes.

  • Geographical Focus 

Some funds concentrate on stocks traded on foreign exchanges or a mix of international exchanges.

  • Business Sector 

Explore funds that specialise in sectors like FMCG, technology, healthcare, or real estate.

  • Types of Assets

Some funds follow both domestic and foreign equities, bonds, commodities etc.

  • Market Opportunities 

These funds investigate emerging markets or other swiftly developing sectors for potential investment.

You can customize your allocation if you desire more exposure to specific markets in your portfolio. This could include increasing your investment in emerging markets.

3. Choosing Cost-Effective Index Funds and Where to Buy

Selecting the right index fund largely depends on cost considerations. While index funds are generally cost-effective, it’s essential to recognize that not all are equally inexpensive. Administrative costs are deducted as a percentage of your investment returns, and management costs can differ significantly, affecting your long-term returns. Typically, larger funds tend to have lower fees.

When deciding where to purchase an index fund, consider factors such as fund selection, convenience, trading costs, and any commission-free options. Your choice may be influenced by your investment preferences, including impact investing.

To purchase an index fund, you have two options: you can either choose a fund house or a brokerage firm. You can decide between online or offline modes based on your preference.

4. Monitor Your Index Funds

Many people are drawn to index funds because of their simplicity and the way they spread out investments. However, just because they’re managed passively doesn’t mean you should completely ignore them. It’s a good idea to keep an eye on your investment over time. Evaluate the performance of your index fund. Don’t be alarmed by slight differences, as they could be due to minimal trading costs and taxes.


In conclusion, crafting a hassle-free investment portfolio with index funds in India offers a promising path to financial growth. To begin, set clear financial goals – short-term or long-term. Dive into fund research, considering market cap, geography, sectors, and asset types. Select cost-effective index funds, keeping fees in check. Decide where to buy based on convenience and preferences. And remember, passive management doesn’t mean neglect; monitor your investments for optimal returns.


  1. Is it fine to invest exclusively in index funds?

For those new to investing or looking for a passive approach, index funds are a good choice. However, as your investment knowledge grows, you can diversify your portfolio to suit your changing risk tolerance and financial goals.

  1. How long should I leave my money in index funds? 

The duration for keeping your money in index funds depends on your investment goals and risk tolerance. Typically, index funds suit long-term investors, so be prepared to commit for 7 to 10 years. Yet, remember to assess your financial situation and seek advice from a financial expert before making investment choices.

  1. What are the advantages of index funds?

Investing in index funds provides diversification, cost-effectiveness, and simplicity. It’s ideal for long-term investors who want to track market performance with minimal fees and effort.

  1. How do actively managed funds and index funds differ?

Actively managed funds are directed by fund managers who make investment decisions, whereas index funds mimic the performance of specific indices without active management.

  1. How do I compare the performance of different index funds?

To evaluate different index funds, examine their historical returns, expense ratios, and the specific index they mirror.