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Index Fund vs ETFs: Which Is Right for You?

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Investing in the stock market can be overwhelming, with so many options available. However, two of the most popular choices are index funds and exchange-traded funds (ETFs). Both of these options track the performance of a specific index, but they have some differences that you should know about before deciding which one to use.

Index Fund vs ETF
Index Fund vs ETF – Which is Better to Invest?

In this article, we’ll explore Index fund vs ETF in-depth, including what they are, what they offer, and which one might be the best fit for your investment goals.

Understanding the differences between Index fund vs ETF can help you make better investment decisions and potentially increase your portfolio’s returns. So, let’s get started!

Consider reading: Types of Mutual Funds in India

Index Fund vs ETF: Key Differences

FactorIndex FundsETFs
Investment StrategyPassivePassive
Expense RatioLowLow
TradingEnd of DayIntraday
Minimum InvestmentHighLow
Tax EfficiencyHighHigh
TransparencyLowHigh
LiquidityModerateHigh
Cost of TradingNo trading feesCommission fees
ManagementProfessional managerSelf-managed
Index fund and ETF Key Differences

Note: This table provides a general overview of the differences between index funds and ETFs. Please do your own research and consult a financial advisor before making any investment decisions.

What is an ETF in India?

An Exchange-Traded Fund (ETF) is a versatile investment tool that mirrors the performance of prominent market indices like the Nifty 50 or BSE Sensex, or specific asset classes such as gold or energy. Trading on stock exchanges akin to individual stocks, ETFs empower investors with the convenience of diversifying their portfolio, thus enabling exposure to a wide array of assets.

In the Indian financial landscape, the Securities and Exchange Board of India (SEBI) oversees the regulation of ETFs. These funds can be acquired and managed through a brokerage account, much like individual stocks. Their popularity in India stems from their cost-effectiveness and the ease they offer in investing across a diverse asset range.

Moreover, ETFs are managed by professionals, enhancing the likelihood of substantial returns over an extended period. It’s important to note that the returns on your ETF investment are directly influenced by the corresponding index’s performance. This means that if the index experiences a surge, your returns are likely to increase, whereas a decline in the index would reflect in reduced returns.

Features of an ETF

Here are some key features of exchange-traded funds (ETFs):

  1. Diversification: ETFs allow investors to diversify their portfolios by providing exposure to a wide range of assets, such as stocks, bonds, commodities, and real estate.
  2. Professional management: ETFs are managed by professional investment firms, which can help to reduce the time and effort required to manage a portfolio.
  3. Low costs: ETFs typically have lower fees than actively managed mutual funds, which can help to increase returns over the long term.
  4. Transparency: ETFs provide investors with transparency about the assets in the fund, as well as the fund’s performance and holdings.
  5. Liquidity: ETFs are traded on a stock exchange, which means they can be bought and sold throughout the trading day. This can make them more liquid than some other investment vehicles.
  6. Flexibility: ETFs offer investors the flexibility to invest in a wide range of assets and markets, and they can be bought and sold like stocks.
  7. Tax efficiency: ETFs may be more tax-efficient than other investment vehicles because they typically have lower turnover rates and generate fewer capital gains.

How to Buy an ETF

To buy an ETF, you will need to have a Demat account and a trading account with a broker. From the Demat account, you can buy any ETFs from the exchanges.

ETFs Available in India for Purchase

Below is the list of ETFs available on NSE for investors to purchase:-

ISSUER NAMENAMESYMBOLUnderlying IndexLAUNCH DATE
Edelweiss AMCEdelweiss Exchange 
Traded Scheme – NIFTY
NIFTYEESNIFTY 50 Index8-May-15
ICICI Prudential AMCICICI Prudential 
NIFTY ETF
 ICICINIFTYNIFTY 50 Index20-Mar-13
Kotak AMCKotak NIFTY ETFKOTAKNIFTYNIFTY 50 Index2-Feb-10
Motilal Oswal AMCMOSt Shares M50M50NIFTY 50 Index28-Jul-10
Quantum AMCQuantum Index Fund 
– Growth
QNIFTYNIFTY 50 Index10-Jul-08
Religare AMCReligare Invesco 
NIFTY ETF
IVZINNIFTYNIFTY 50 Index13-Jun-11
SBI AMCSBI ETF NIFTYSETFNIF50NIFTY 50 Index23-Jul-15
UTI AMCUTI NIFTY ETFUTINIFTETFNIFTY 50 Index3-Sep-15
Birla Sun Life AMCBirla Sun Life NIFTY ETFBSLNIFTYNIFTY 50  Index21-Jul-11
ICICI Prudential AMCICICI Prudential 
CNX 100 ETF
ICICINF100NIFTY 10020-Aug-13
Kotak AMCKotak Banking ETFKOTAKBKETFNIFTY Bank4-Dec-14
SBI AMCSBI ETF BankingSETFNIFBKNIFTY Bank20-Mar-15
Motilal Oswal AMCMOSt Shares M100M100NIFTY Midcap 10031-Jan-11
SBI AMCSBI ETF NIFTY JuniorSETFNN50NIFTY Next 5020-Mar-15
Kotak AMCKotak PSU Bank ETFKOTAKPSUBKNIFTY PSU BANK8-Nov-07
ICICI Prudential AMCICICI SENSEX Prudential 
Exchange Traded Fund
ICICISENSXS&P BSE Sensex10-Jan-03
UTI AMCUTI Sensex ETFUTISENSETFS&P BSE Sensex3-Sep-15
Reliance Nippon Life 
Asset Management Limited
Reliance ETF 
NIFTY BeES
NIFTYBEESNIFTY 50 Index28-Dec-01
Reliance Nippon Life 
Asset Management Limited
Reliance ETF 
NIFTY 100
NETFNIF100NIFTY 10022-Mar-13
Reliance Nippon Life 
Asset Management Limited
Reliance ETF 
Bank BeES
BANKBEESNIFTY Bank27-May-04
Reliance Nippon Life 
Asset Management Limited
CPSE ETFCPSEETFNIFTY CPSE Index28-Mar-14
Reliance Nippon Life 
Asset Management Limited
Reliance ETF 
Dividend Opportunities
NETFDIVOPPNIFTY Dividend 
Opportunities 50
15-Apr-14
Reliance Nippon Life 
Asset Management Limited
Reliance ETF 
Consumption
NETFCONSUMNIFTY India 
Consumption
3-Apr-14
Reliance Nippon Life 
Asset Management Limited
Reliance ETF Infra BeESINFRABEESNIFTY Infrastructure29-Sep-10
Reliance Nippon Life 
Asset Management Limited
Reliance ETF Junior BeESJUNIORBEESNIFTY Next 5021-Feb-03
Reliance Nippon Life 
Asset Management Limited
Reliance ETF PSU 
Bank BeES
PSUBNKBEESNIFTY PSU BANK25-Oct-07
ICICI Prudential AMCBHARAT 22 ETFICICIB22S&P BSE 
BHARAT 22 index
28-Nov-17
List of ETFs available in India

Consider reading: CPSE ETF Details, Stocks List, and History

What are the Charges Applicable when Purchasing an ETF?

When you buy an ETF, you are effectively buying a basket of stocks that are trading as an ETF, so can consider an ETF to be as good as a stock while buying/selling.

So to purchase an ETF, you will need to pay the applicable fees:

  • Brokerage(including GST)
  • STT
  • Stamp duty
  • any other charge (depending on the broker)

What is an Index Fund in India

An Index Fund is a type of mutual fund in India, meticulously crafted to mirror the performance of specific market indices, such as the Nifty 50 or BSE Sensex. This investment approach is engineered to offer investors an economical and straightforward path to invest in a broad spectrum of stocks or other assets, representing a comprehensive market or a particular sector.

In the realm of Indian finance, the Securities and Exchange Board of India (SEBI) plays a pivotal role in regulating index funds. These funds are managed by seasoned investment firms, and investors can access them through a brokerage account or directly from the fund managers themselves.

Index funds in India are synonymous with multiple investor advantages. They provide a diversified investment portfolio, the expertise of professional fund management, affordability in costs, and the prospect of substantial long-term returns.

They are especially appealing to investors keen on stock market involvement without the demands of actively managing a portfolio. This makes index funds an ideal choice for those seeking a balanced approach to stock market investment.

Features of an Index Fund

Here are some key features of index funds:

  1. Diversification: Index funds provide investors with exposure to a diversified portfolio of stocks or other assets that represents a broad market or sector. This can help to reduce risk and increase the potential for returns.
  2. Professional management: Index funds are managed by professional investment firms, which can help to reduce the time and effort required to manage a portfolio.
  3. Low costs: Index funds typically have lower fees than actively managed mutual funds, which can help to increase returns over the long term.
  4. Transparency: Index funds provide investors with transparency about the assets in the fund, as well as the fund’s performance and holdings.
  5. Flexibility: Index funds offer investors the flexibility to invest in a specific market or sector, and they can be bought and sold through a brokerage account.
  6. Tax efficiency: Index funds may be more tax-efficient than other investment vehicles because they typically have lower turnover rates and generate fewer capital gains.
  7. Automatic rebalancing: Index funds are typically automatically rebalanced to maintain their desired asset allocation, which can help to maintain a diversified portfolio.

How to Buy an Index Fund

You can buy an index fund just like a mutual fund. You don’t need a Demat account to buy an Index fund. You can simply buy an Index fund from an AMC’s website or mutual fund platforms like PayTM Money and Grow.

What Index Funds are Available in India for Purchase?

Below are the Index funds available for purchase from different AMCs:

Scheme NameBenchmark
Aditya Birla Sun Life IndexNIFTY 50 Total Return Index
DSP Nifty 50 Index FundNIFTY 50 Total Return Index
DSP Nifty Next 50 Index FundNIFTY Next 50 Total Return Index
Franklin India Index NSE NiftyNIFTY 50 Total Return Index
HDFC Index Fund Nifty 50 PlanNIFTY 50 Total Return Index
HDFC Index SensexS&P BSE Sensex Total Return Index
ICICI Prudential Nifty Index FundNIFTY 50 Total Return Index
ICICI Prudential Nifty Next 50 Index FundNIFTY Next 50 Total Return Index
ICICI Prudential Sensex Index FundS&P BSE Sensex Total Return Index
IDBI Nifty IndexNIFTY 50 Total Return Index
IDBI Nifty Junior IndexNIFTY Next 50 Total Return Index
LIC MF Index NiftyNIFTY 50 Total Return Index
LIC MF Index SensexS&P BSE Sensex Total Return Index
Motilal Oswal Nifty Bank Index FundNIFTY Bank Total Return Index
Motilal Oswal Nifty Midcap 150 Index FundNIFTY Midcap 150 Total Return Index
Motilal Oswal Nifty Smallcap 250 Index FundNIFTY Smallcap 250 Total Return Index
Nippon India Index NiftyNIFTY 50 Total Return Index
Nippon India Index SensexS&P BSE Sensex Total Return Index
SBI Nifty IndexNIFTY 50 Total Return Index
Tata Index NiftyNIFTY 50 Total Return Index
Tata Index SensexS&P BSE Sensex Total Return Index
Taurus Nifty IndexNIFTY 50 Total Return Index
UTI Nifty IndexNIFTY 50 Total Return Index
UTI Nifty Next 50 Index FundNIFTY Next 50 Total Return Index
List of Index funds in India

Consider reading: NIFTY 50 Index Details, Stocks List, and Weightage

What are the Charges Applicable While Purchasing an Index Fund in India?

When you purchase an Index fund; you just pay the expense ratio for the mutual fund. Generally, the expense ratio for Index funds is very low as compared to normal mutual funds, which are around 0.10% to 0.20%.

Index Fund vs ETF Which is Better?

It can be difficult to determine which is better, an index fund or an exchange-traded fund (ETF), as it ultimately depends on the individual investor’s financial goals and risk tolerance.

Both index funds and ETFs offer a convenient and low-cost way to invest in a diversified portfolio of stocks or other assets, and they can be attractive options for long-term investors.

Here are some factors to consider when comparing index fund vs ETF:

  1. Cost: Both index funds and ETFs tend to have lower fees than actively managed mutual funds, but ETFs may have slightly lower fees than index funds.
  2. Diversification: Both index funds and ETFs provide investors with exposure to a diversified portfolio of stocks or other assets, but ETFs may offer a wider range of investment options.
  3. Liquidity: ETFs are traded on a stock exchange and can be bought and sold throughout the trading day, while index funds can only be bought or sold at the end of the trading day. This may make ETFs more liquid than index funds.
  4. Tax efficiency: Both index funds and ETFs may be more tax-efficient than other investment vehicles because they typically have lower turnover rates and generate fewer capital gains.

Final Thoughts on Index Fund vs ETF

In conclusion, index funds and ETFs are both excellent investment vehicles that can help you achieve your financial goals. However, there are some key differences between the two that you should consider before making a decision.

Index funds are passively managed, which means that they track a particular index and do not make any active trading decisions. This makes them a good option for investors who are looking for a low-cost, hands-off investment. ETFs, on the other hand, are actively managed, which means that the fund manager can make trades to try to outperform the market. This can lead to higher returns, but it also comes with higher fees.

Ultimately, the best investment for you depends on your individual needs and risk tolerance. If you are looking for a low-cost, hands-off investment, then an index fund is a good option. If you are willing to pay higher fees in exchange for the potential for higher returns, then an ETF may be a better choice.

Be sure to do your research and consult with a financial advisor before making any investment decisions.

FAQs on Index Fund vs ETF

Which is better index fund or ETF?

Choosing between index funds and ETFs depends on your investment style. Index funds are ideal for those seeking a cost-effective, diversified, and passive long-term investment with SIP options. ETFs offer flexibility with real-time trading, suitable for those preferring active management and short-term strategies. Both can serve as long-term investments based on individual goals.

Why is ETF cheaper than index?

ETFs are often cheaper than index funds because they typically have lower management fees and operating costs. Since ETFs trade on an exchange like stocks, investors can buy and sell without a sales commission, whereas index funds may incur higher broker fees. Additionally, ETFs are designed to be more tax-efficient, which can further reduce costs for investors.

How do I choose an ETF or index fund?

Choosing between an ETF or index fund involves comparing their expense ratios, trading flexibility, minimum investment requirements, and tax efficiency. Evaluate your investment goals, assess the funds’ performance histories, and consider their market tracking accuracy to help make an informed decision. Always check the underlying assets of the fund for alignment with your strategy.

Is it better to invest in stocks or ETF?

Choosing between investing in stocks or ETFs depends on your investment strategy and risk tolerance. ETFs offer diversified exposure, reducing individual stock risk, making them ideal for passive investors seeking a managed portfolio. For active investors craving control and higher potential returns, individual stocks could be more suitable.

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