As more and more people in Indian starting to invest in stocks and mutual funds , the interest in Index fund as well as ETF has seen significant rise. In this article lets understand the basics of Index fund vs ETF and find out which option is best for you to invest in.
https://weinvestsmart.com/wp-content/uploads/2021/01/Index-fund-vs-ETF.jpg 1200w" sizes="(max-width: 1024px) 100vw, 1024px">Index fund vs ETF
What is an ETF in India?
ETF stands for exchange traded fund. ETF created to match or track the components of an Index like NIFTY 50/Sensex etc. For example the HDFC Nifty 50 ETF is created to track the performance of NIFTY 50.
Basically when you invest in an ETF then you are investing your money in the Index that the ETF is tracking. So if you for example invest in HDFC Nifty 50 ETF the fund manager of the ETF will invest in the portfolio which looks exactly similar to NIFTY 50 considering the weightage of the stocks in the Index.
So your investment returns will depend on the performance of the Index, if the Index goes up then your returns go up. If the Index goes down then your returns will go down.
Features of an ETF
An exchange traded fund (ETF) is a basket of securities that trade on an exchange, like a stock trading in the exchange
ETF share prices goes up and down all day as the ETF is bought and sold just like a stock.
ETFs can contain all types of investments including stocks, commodities, or bonds; ETF can be created for to track any underline security.
ETFs offer low expense ratios and fewer brokerage(depending on the stock broker) than buying the stocks individually.
How to buy an ETF?
To buy an ETF, you will need to have a demat account and trading account with a broker. From the demat account you can buy any ETFs from the exchanges.
What are the ETFs available in India for purchase?
Below are the list of ETFs available of NSE for investors to purchase:-
What are the charges applicable while purchasing an ETF?
When you buy an ETF, effectively you are buying a basket of stock which trading as an ETF. so can consider an ETF to as good as stock while buying/selling. So to purchase an ETF you will need to pay the applicable fees-
any other charge(depending on broker)
What is an Index fund in India?
Index funds are just like ETF which invest your money in a basket of securities which is aligned to an underline securities/index. The difference between Index fund and ETF is that Index funds are not actively traded in exchanges! Like mutual funds Index funds trade end of day basis and Index fund has a NAV which is reported on an end of day basis.
Index fund have an experience ratio like normal mutual funds although very low as compared with a normal mutual fund. Similar to ETF , an Index fund’s performance depends on the performance of the Index.
Features of an Index fund
An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of an index.
Index funds have lower expenses and fees than actively managed mutual funds.
Index funds are managed on an end of day basis as opposed to ETFs which are traded in market like stocks.
How to buy an Index fund
You can buy an index fund just like 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 fund are available in India for purchase?
Below are the Index funds available for purchase from different AMCs-
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 ration for Index funds are very low as compared to normal mutual funds which is around 0.10% – 0.20%.
If you are investing in stocks already and have a demat/trading account with you then it makes sense to buy ETF directly from exchanges. But if you don’t have a demat account then you can stick to buying Index funds from any mutual fund house rather than creating a demat account only for the purpose of buying ETFs.
For retail investor in the battle of Index fund vs ETF; Index funds fund win the battle because of the ease at which the investors can invest in Index funds.
Index fund vs mutual fund – what is the difference?
Index fund is just another type of mutual fund. Index fund invest your money in an underline index where other types of mutual funds directly invest in stocks or other securities.
What is Tracking Error in ETFs?
Tracking error is the difference in actual performance between an ETF and its corresponding benchmark Index. The tracking error can be viewed as an indicator of how actively/properly a fund is managed and its corresponding risk level. Evaluating a past tracking error of a fund manager may provide insight into the level of benchmark risk control the fund manager.
Why should you invest in an ETF or Index funds
Investing in ETF/Index fund reduces your risk of over exposing your investment in one stock/security. Indexes in general performs really well over the long run. ETF/Index funds have relative low levels of expenses and provide good liquidity for the investors.
Index fund vs ETF Conclusion
If you are a retail investor; more often then not Index funds are best for you as it eliminates overhead of creating a demat account to buy ETFs , you can skip all the hassle of paying account maintenance fees and all the hidden charges to maintain you demat account.
As more and more people are getting awareness of ETFs , it’s popularity is gaining momentum as well. If you are an active investors and keeping tap on market then ETFs are a great choice for you.
The battle of Index fund vs ETF is immaterial if you are a disciplined investor and can invest in markets in regular intervals time to get the most out of your investments!