index funds can lose value. they track the market. market falls, fund falls. no floor. no guarantee.
but it is not like a single stock. a stock can go to zero. a broad index fund cannot. the entire market would have to collapse.
the risk is not total loss. it is volatility. and timing.
what causes losses
markets drop. index funds drop with them. nifty fell 38% in 2020. 16% in 2022. selling at the bottom locks in losses.
large companies dominate index funds. market-cap weighting means more money in bigger stocks. by mid-2025, seven us stocks made up 34% of the s&p 500. up from 20% in 2023. not as diversified as it looks.
in india, two companies made up nearly 40% of the defence index. that is a bet on two stocks. not a diversified portfolio.
tracking error costs money. the fund does not perfectly match the index. a 0.5% tracking error means 0.5% less return each year.
index rebalancing costs money. when the index changes, the fund buys and sells. transaction costs add up. sometimes forced to buy high and sell low.
passive funds sell together. this can cause sharp drops. the popularity of passive investing can make markets more fragile.
how bad can it get
nifty fell 59.5% in 2008. msci india fell 62.6% that year. recovery took years. about 6 years and 10 months.
index funds can lose significant value. past performance is not a guarantee.
the real problem
the fund is not the problem. the investor is.
most losses happen because people sell at the bottom. markets drop 20%. they panic. they sell. markets recover 30%. they miss it.
index funds work if the investor stays invested. 7-10 years is generally recommended.
when they do not lose money
over long periods, index funds have delivered positive returns. from 1999 to 2026, ₹10 lakh in sensex grew to roughly ₹2.89 crore. missing the five best days would have cut it to ₹1.80 crore.
index funds aim for equity-like returns. they are not guaranteed in any given year.
frequently asked questions
1. can an index fund go to zero ?
extremely unlikely. the entire market would have to collapse.
2. what is the biggest risk ?
behavioural risk. selling during a downturn locks in losses.
3. how much can an index fund lose ?
nifty fell 59.5% in 2008. significant losses are possible.
4. are index funds safe for beginners ?
simple and low cost. but they can lose value. a 5-7 year horizon is recommended.
5. do index funds track the index perfectly ?
no. tracking error and expense ratios cause small underperformance.
