Cost – ETFs are low cost products as they are passively managed whereas mutual funds are generally actively managed, therefore, the cost is comparatively high. His belief is not without basis – more than 90% of large cap companies in the US failed to beat the S&P 500 index over long investment tenor. ETFs and index funds are both passive investments that track a market index, while providing diversification of portfolio, and have lower management cost . Similar to index funds, Exchange-Traded Funds pool capital from investors and put it in a portfolio comprising stocks that are components of a benchmark index like the Nifty 50. An ETF may also track a commodity index like the Gold Price Index .

etfs vs index funds

The above two are very important points to consider in terms of ETF vs mutual fund debate. For example, a bond basket has corporate or government bonds, and an energy basket holds energy production and distribution stocks. The real estate basket includes stocks of real estate development companies. You can do everything from the Fi App, including p2p payments, fund transfers, bill payments, and more, with features to automate every action. You also get a Fi Debit card, spends insights and tools to grow your investment and earn rewards. In Index Funds, though, you can invest your preferred amount and get corresponding units in lieu of, with a minimum being ₹500.


Passive participation is just the opposite, wherein you observe the proceedings without directly influencing the activities or their outcome. Any Grievances related the aforesaid brokerage scheme will not be entertained on exchange platform. Pay 20% or “var + elm” whichever is higher as upfront margin of the transaction value to trade in cash market segment. Index ETF like the Nifty 50 ETF to protect your option position from downside risk. Such a hedging strategy would require you to short-sell the Nifty 50 ETF. This way, you can protect your index option position from going into losses.

How to choose between ETFs and index funds?

Since ETFs and index funds are similar, you might have trouble picking the right passive investment vehicle for you. In the end, the decision boils down to one’s trading style. ETFs, much like stocks, trade intraday. They are a good choice if you want to take advantage of price movements within the day.

Index funds will be a better option if you are not concerned about seizing intraday opportunities. Moreover, while you need to be well-versed with the trading process if you want to trade ETFs, that is not necessary with index funds.

ETFs enjoy a smaller market of buyers and sellers and can be less liquid as compared to Index funds and other mutual funds. We avoid debt mutual fund schemes that aim for higher yields by taking undue higher credit risk with substantial exposure in instruments issued by private issuers. In case of ETFs too, any dividend received by the fund is typically reinvested similar to the growth option of mutual funds even though it does not have a growth or IDCW option. Index funds are suitable for those investors who wish to invest in the equity market but are wary of the volatility of stocks. However, there is often a marginal difference in the returns of the index and the index fund, called a tracking error.

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At the same time, additional demand / supply is absorbed due to the action of the arbitrageurs. Investors can begin investing a small portion of money in periodic intervals. Index fund investments do not require investors to have a Demat account. Both ETFs and mutual funds are very similar products, but you must consider the above facts about ETF vs mutual fund and take an informed decision before investing in ETF or mutual funds. When you invest in index funds, you have the option to opt for a growth plan or income distribution cum capital withdrawal plan (IDCW – erstwhile dividend plan). If you opt for the growth plan, the dividend is automatically reinvested in the scheme, whereas in case of IDCW, the NAV is adjusted to reflect the distribution of dividend.

For instance, if you are a long-term investor with long-term goals, you would prefer a disciplined approach to invest. This can be best provided by an Index Fund via the SIP facility. However, if you are keen on trading when the markets are volatile, then ETFs might serve as the more worthy tool.

Index Fund vs. ETF: What’s the Difference? What is right for you?

Both index funds and ETFs come with some degree of risk factor. Therefore, investors must make a choice depending on their financial goals and comfortability with both options. Dividend Payouts – With ETFs, the dividend gets credited to the investor’s bank account and this can be manually reinvested later. On the other hand, Index funds offer some amount of convenience since investors can opt for a growth plan which allows dividends to be directly reinvested. Which one is better for new investors – Between Index funds and ETF, the latter is an ideal choice for someone who is an active trader.

By definition, the Tracking error is the deviation of a passive fund’s returns from its underlying index. Factors such as, cash balance held by the fund, the time lag in rebalancing/reshuffling of the portfolio in accordance with the index, dividend payouts, etc., can cause tracking error to rise. Generally, the expense ratio of an index fund is slightly higher than that of ETF, though it is lower than actively managed funds. The average expense ratio of ETFs is 0.19% as of May 2021 and 0.34% in case of index funds. Therefore, the lower expense ratio of ETFs compared to index fund may not result insignificant benefit in the long run. The expense ratio of ETF is lower than that of index funds but there are additional costs to owning an ETF.

For all investors looking to unearth stocks that are poised to move. Sector rotation ETF investing strategy involves picking the sectors that are currently in demand and doing well. For instance, in view of the current COVID-19 situation, pharmaceutical stocks are having a really good run in the market. Long-term capital gains are charged at 20% as per Sec 112 of the Income Tax Act. You should note that indexation benefits will be available for such gains. Long-term capital gains are charged at 10% over and above Rs 1 lakh as per Sec 112A of the Income Tax Act.

But in case of mutual funds, the buy sell price is applied at the end of the day based on the NAVs declared. If you look at the last 1 year in the Indian Markets as well, ETF funds have beaten most equity mutual fund categories. This may simply be due to market conditions which favored large cap, but the interesting point here is that ETFs were able to beat large cap equity mutual funds. In the long term, the performance differential between actively managed funds and ETFs will narrow.

You should note that no indexation benefit will be available for such gains. Dividend is a distribution made by a company to its shareholders out of its profits. It can be viewed as a reward from the company for investing in its equity. ETFs derive their liquidity first from trading of the units in the secondary market and secondly through the in-kind creation / redemption process with the fund in creation unit size.

Index Funds Vs ETFs : Top Differences You Must Know

Index funds can be purchased just like any other mutual fund, i.e. directly through the AMC or via mutual fund distributor. The NAV of the fund is declared at the end of the day; any purchase or redemption will be carried out at the closing value. Moreover, you can purchase index funds through SIP or lump sum mode. Index funds will be a better option if you are not concerned about seizing intraday opportunities. Moreover, while you need to be well-versed with the trading process if you want to trade ETFs, that is not necessary with index funds. A lot of factors need to be considered, such as costs, returns, etc.

Which one is better between ETF or mutual funds?

ETFs are considered better due to their higher liquidity, lower net fees, and higher tax efficiency than mutual funds.

By being passive in approach, these instruments do not aim to beat the market or even the underlying Index they follow. Investments in securities market are subject to market risk, read all the related documents carefully before investing. As stated earlier, the taxation of capital gains depends on the period of holding of your assets.

However, when it comes to ETFs, the lack of liquidity can undoubtedly be a concern. And that’s because, unlike an Index Fund, buying the ETF is like any other equity share. So imagine a scenario where you want to sell 100 units of your ETF but say there are no buyers for those units.

Index funds, as the name suggests, aim to mimic the performance of particular index such as Nifty 50, S&P BSE Sensex, S&P BSE 500, etc. Following a passive investment strategy, these funds try to match constituents that form part of the index with an aim to mirror its performance. Therefore, when you invest in an index fund, the scheme’s performance will mimic that of the index. Index funds are aimed at providing similar returns as the index they track.

Characteristics of Index Funds

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Assess your risk appetite, financial objective, and investment horizon to determine whether to invest in an actively managed fund or passive fund, or a combination of both. Advisably, you should avoid sector-oriented passive funds if you do not have a very high risk appetite. For Certified Check vs. Cashier’s Check certain segments like mid-cap and small-cap, actively managed funds have better scope of generating high alpha in the long run. To achieve its target, passive funds invest in the same basket of securities that form part of the underlying index and in the same proportion. Exchange Traded Funds and Index funds are the most popular approaches followed by mutual fund houses.

That is because ETFs, much like stocks, can be traded on exchanges throughout the day. So the price of an ETF goes up and down during trading hours. Index Funds are passively managed instruments, but ETFs can be passively managed or actively managed funds. As it stands, about 20% of the ETFs in the United States are actively managed ETFs. This means there is an investment team that is researching companies and making tactical decisions on how to build the ETF’s portfolio, which stocks to buy, which stocks to sell, etc.

etfs vs index funds

Swing trading basically entails trying to capture the short-term price movements of an ETF for a few days to weeks. The high liquidity that ETFs enjoy combined with the freedom to buy and sell ETF units throughout the day makes them a viable ETF strategy. An SIP strategy requires you to invest a fixed amount of money at the same time each month in an ETF of your choice, irrespective of the price that the ETF is trading for. When done for a long enough period of time, you can benefit from the rupee cost averaging phenomenon. Maintenance margin requirements for non-conventional ETFs, such as leveraged ETFs, are more strict than standard ETFs.

  • Effortless, growth-oriented and suitable for investors who don’t have the time to keep a constant tab on their investments, passive investing avenues like ETFs and Index funds have grown in demand.
  • Index Funds and ETFs are categorised under what is known as “Indexing.” Indexing involves investing in stocks of an underlying benchmark index on the same proportion and mirroring the portfolio.
  • In case of non allotment the funds will remain in your bank account.
  • In Index Funds, though, you can invest your preferred amount and get corresponding units in lieu of, with a minimum being ₹500.
  • While ETFs and Index Funds are similar, there exist certain subtle differences.

Systematic investment plans or SIPs are a popular method of investing for retail investors, with monthly inflows consistently crossing the Rs. 8,000 crore mark for many months now. While Index Funds offer the SIP facility, ETFs generally do not offer a SIP option. This unit versus amount context has a bearing on the minimum investment one needs to put up when purchasing either of these financial products.

Nevertheless, the situation in India is certainly improving from a liquidity point of view in some ETFs. But liquidity is a problem, especially in some sectoral or smart beta ETFs where the trading volumes are still on the lower end.

Know better and conduct your research about specific ETFs or Index Funds and learn how to start investing in them wisely by visiting the WealthDesk. WealthDesk provides a researched-backed mix of stocks and portfolios created by SEBI-registered investment professionals to help you diversify your portfolio and improve your returns. The index fund returns are slightly lower for the investors than the index because of the deduction of management fees.