Note: This article discusses Indonesian financial products and markets. The principles of index investing apply globally, though specific products, indices, and tax treatments vary by country.

What Is an Index Fund?

An index fund is a type of mutual fund that tracks the movement of a specific index — rather than trying to beat it. This is the foundation of passive investing.

Instead of employing a team of analysts to pick the “best” stocks, index funds simply buy all (or most) of the stocks in a given index, in the same proportions.

How Does It Work?

For example, the IDX30 index contains the 30 largest stocks on the Indonesia Stock Exchange. An IDX30 index fund will buy all 30 stocks with proportions matching their weight in the index.

Component	Active Mutual Fund	Index Mutual Fund
Goal	Beat the index	Track the index
Investment manager	Actively picks stocks	Only replicates index
Management fee	1-3% per year	0.2-1% per year
Turnover (buying/selling)	High	Low
Transparency	Portfolio can change anytime	You know what’s in it (same as index)

Why Are Fees Lower?

Because the investment manager doesn’t need to conduct deep research or active trading. They only need to ensure the portfolio follows the index composition. This process is largely automated.

The fee difference might seem small (e.g., 1% vs 2%), but the impact is huge over the long term:

Initial Investment	Market Return	Annual Fee	Result After 20 Years*
IDR 100 million	10%	0.5% (index)	IDR 601 million
IDR 100 million	10%	2.0% (active)	IDR 466 million
Difference			IDR 135 million

A 1.5% higher annual fee consumes IDR 135 million from a IDR 100 million investment over 20 years. That’s money going into the investment manager’s pocket, not yours.

Are Active Funds Better?

Global data shows that the majority of active funds underperform their index over the long term. The SPIVA (S&P Indices Versus Active) report consistently shows:†

• More than 80% of active funds in the US underperform the S&P 500 over 15 years
• In emerging markets (including Indonesia), the figures are similar

In Indonesia, SPIVA data for the domestic market is still limited, but the principle is the same: after deducting fees, the average active investment manager cannot consistently beat the market.

Some active investment managers do beat the index in certain periods. The problem is: you don’t know which ones will win in the future. Past performance is not a guarantee of future performance.

Available Indices in Indonesia

Index	Contents	Characteristics
IDX30	30 most liquid stocks	Most popular for index funds
LQ45	45 most liquid stocks	Similar to IDX30, slightly broader
SRI-KEHATI	25 sustainable stocks (ESG)	Selected based on environmental & governance criteria
JCI (Composite)	All stocks on IDX (~900+)	Broadest index, but not all stocks are liquid
JII (Jakarta Islamic Index)	30 most liquid sharia stocks	For sharia investors — see Sharia Mutual Funds
IDX Value30	30 value stocks	Factor-based on value
IDX High Dividend 20	20 high dividend stocks	Focus on dividend yield

For most passive investors, IDX30 or SRI-KEHATI are the most practical choices because index fund products tracking them are most available. See complete product comparison for expense ratio and tracking error details.

Index Funds Available in Indonesia

Product Name	Reference Index	Investment Manager	Expense Ratio‡
BNP Paribas SRI-KEHATI	SRI-KEHATI	BNP Paribas AM	~1.0%
Bahana IDX30	IDX30	Bahana TCW	~0.7%
Simas IDX30	IDX30	Sinarmas AM	~0.8%
Principal Index IDX30	IDX30	Principal AM	~0.8%
Avrist IDX30	IDX30	Avrist AM	~0.8%
Manulife Indonesia Stock Index	LQ45	Manulife AMII	~0.9%
Pinnacle IDX30	IDX30	Pinnacle IM	~0.6%

Note: Index fund expense ratios in Indonesia (0.6-1.0%) are still higher than developed markets like the US (0.03-0.2%), but much lower than Indonesian active funds (1.5-3%). Verify the latest expense ratios in each product’s fund fact sheet.

How to Buy Index Funds

1. Open an account on platforms like Bibit, Bareksa, or IPOT
2. Search for index funds — usually there’s a separate category
3. Choose one product (e.g., Bahana IDX30)
4. Buy with the amount you want (minimum IDR 10,000 on Bibit/Bareksa)
5. Set up regular investment (auto-invest) every month

There are no subscription fees or redemption fees on most platforms for mutual funds. Truly zero percent.

Tax Advantages of Mutual Funds in Indonesia

This is what makes mutual funds very attractive in Indonesia:

Tax Aspect	Mutual Funds	Direct Stocks
Capital gains tax	0%	0.1% of sale value
Dividend tax	Not relevant (automatically reinvested)	10% final
Tax when selling	None	0.1% of sale value

Mutual fund gains — including index funds — are 100% tax-free for individual investors in Indonesia. This is a huge structural advantage.

Index Funds vs ETFs

In Indonesia, you can also buy ETFs (Exchange-Traded Funds) listed on the IDX. But there are important differences:

Aspect	Index Mutual Funds	ETFs on IDX
How to buy	Via app (Bibit, Bareksa)	Via stockbroker (IPOT, Stockbit)
Minimum purchase	IDR 10,000	1 lot (100 shares) — can be IDR 50,000-500,000+
Liquidity	Always buyable/sellable (through IM)	Depends on trading volume (often thin)
Transaction fee	0%	Broker commission (0.15-0.29%)
Tax	0% on gains	0.1% on sales

Practical recommendation: For most Indonesian investors, index mutual funds via apps are more practical than ETFs. ETF liquidity in Indonesia is still very low — you might have trouble selling at a fair price.

How to Properly Choose an Index Fund (Not Based on AUM)

Articles on Bareksa often rank index funds by “largest assets under management” (AUM), as if a product with large AUM is automatically better. This is wrong. What matters for index funds is: (1) expense ratio as low as possible — ideally below 1% per year, (2) tracking error as small as possible — how accurately it follows its reference index, and (3) liquidity. For example, if one LQ45 index fund has a 1.5% expense ratio and another has only 0.7%, the investor loses 0.8% per year forever. Over 20 years with an assumed 10% return, that difference can erode more than 15% of your total portfolio.

Conclusion

• Index funds track the market index at low cost
• The majority of active funds underperform the index over the long term
• In Indonesia, mutual funds (including index funds) are tax-free on gains — a huge advantage
• Can be purchased starting from IDR 10,000 with no transaction fees
• Practical choices: Bahana IDX30, BNP Paribas SRI-KEHATI, or Pinnacle IDX30
• For most investors, index funds are all you need for the equity portion of your asset allocation

To understand how to combine index funds with other instruments in your portfolio, read about equity mutual funds and diversification strategies.

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Sources & References:

* Calculation using compound interest: FV = PV × (1 + r)^n, where r = net return after management fees.
† SPIVA (S&P Indices Versus Active) data available at spglobal.com/spdji. SPIVA reports publish performance comparison data between active funds vs indices for various global markets.
‡ Expense ratios can change. Always check the latest fund fact sheet on the investment manager’s website or OJK (Indonesia’s Financial Services Authority) before investing.

Regulations:

• 0% mutual fund tax for individual investors: Indonesian Income Tax Law No. 36 of 2008 Article 4 paragraph (3) letter i
• Mutual fund product information: OJK Mutual Funds
• Index data: IDX — Market Data, FTSE Russell — SRI-KEHATI

Additional references:

• Bogle, J.C. The Little Book of Common Sense Investing, 2017 (Wiley).
• S&P Dow Jones Indices. “SPIVA® Indonesia Scorecard.”

Disclaimer: This article is for educational purposes only, not investment advice.

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• IDX30 vs LQ45: Which Index Fund is Right for You?
• Active vs Passive Mutual Funds: Complete Comparison
• Index Fund Comparison: Expense Ratios & Performance
• How to Start Investing for Beginners in Indonesia
• ETF vs Mutual Funds: What’s the Difference?