Nifty Bank index funds compared: costs and tracking

The question

A Nifty Bank index fund owns India's large banks as a group, in the index's weights. Ten open-ended index funds track it. They hold the same fourteen shares, so what separates them is their fee and how closely they follow the index.

All figures are Direct plan, Growth option, from daily NAVs to Friday 9 October 2026. Returns of a year or more are annualised.

What you are buying

In the funds' portfolios at 30 September 2026 the index held fourteen banks. The five largest were HDFC Bank at 18.61%, ICICI Bank at 14.18%, Kotak Mahindra Bank at 10.20%, Axis Bank at 10.05% and State Bank of India at 9.92%. Together that is 62.96%.

So this is a single-sector bet with two stocks making up a third of it. The index fell 7.26% between the last close of 2025 and 9 October 2026 and lost 1.66% over the year, before dividends. On 9 October it traded at a P/E of 13.1 and a price-to-book of 1.66; the history is on the Nifty Bank valuation page.

The ten funds

TER is each fund's latest Direct-plan expense ratio, disclosed between 30 September and 8 October 2026. Assets are AMFI's July–September 2026 average, all plans together. Tracking error is the annualised variability of the monthly gap to the index over the last 36 complete months.

The ten funds hold ₹2,818 crore, and three of them, ICICI Prudential, Motilal Oswal and Navi, hold 74% of it. Kotak's fund is six weeks old with ₹3 crore; new funds often carry a high TER until they grow.

How far each fund trails the index

The yardstick is the Nifty Bank total return index, which reinvests dividends. We rebuilt it from NSE's daily closing level and dividend yield, as our fund pages do for their benchmark (methodology). It returned −0.74% over the year, 8.98% a year over three years and 8.76% over five. The price index alone: −1.66%, 7.98% and 7.90%.

Percentage points a year, fund minus index. Over five years Motilal Oswal's fund, the only one that old, trailed by 0.30.

What stands out

The gaps are tight. The three funds with a three-year record finished within 0.04 points a year of each other, and every one-year gap sits between 0.45 and 0.67. Bank shares are among the most traded in the market, so copying this index is cheap. Over the same three years the Midcap 150 index funds trailed their index by 0.43 to 0.78 points a year, and the Smallcap 250 funds by 0.60 to 1.14.

The tracking-error figure says more about the yardstick than the funds. Every fund shows 0.42% to 0.47%, and so do the bank ETFs, at 0.42% to 0.44%. Banks pay most of their dividends in a few months of the year, while our rebuilt index spreads them evenly, which adds monthly noise that no fund could avoid. Compare funds with each other, not with the number. All of them still pass our index funds that actually track screen, which asks for under 0.5%.

Cost and record line up, loosely. The two cheapest funds with a long record, ICICI Prudential and Navi, had the narrowest three-year gaps. SBI, at 0.32%, had the best one-year return, a reminder that one year is a short sample.

What the fee gap is worth over ten years

Take ₹10 lakh and a hypothetical 12% a year before costs, held for ten years:

Among the established funds the fee gap is worth about ₹27,000. Paying Kotak's current 1.46% instead would cost about ₹3.22 lakh, which is why a launch-period TER deserves a second look. The impact of 1% calculator shows how a fee compounds.

The ETF route is the bigger one

Fourteen Nifty Bank ETFs hold ₹28,811 crore, about ten times the index funds. The largest, Nippon India ETF Nifty Bank BeES, averaged ₹8,306 crore at a 0.20% TER, and Kotak Nifty Bank ETF ₹4,549 crore at 0.17%. They need a demat account and trade at a market price; index fund or ETF walks through the trade-off.

What this does not tell you

Whether a bank index beats a banking fund. Active banking and financial-services funds also own insurers, lenders and brokers; this comparison measures them against the Nifty Bank, and the sectoral and thematic list has them all.

How the newer funds will track. Six of the ten are under two and a half years old.

The exact gap to NSE's published TRI. Our rebuilt index is close but not identical. The cost ranking for broad funds is in Nifty 50 index funds ranked by cost, and the index funds and ETFs guide covers the basics.

Index data from NSE Indices; expense ratios from AMFI. The full list is on the index fund page. None of this is a recommendation.