Index Fund vs ETFs: Which Is Right for You?
This post was most recently updated on March 1st, 2024
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.
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: Best Mutual Funds for SIP in India
Page Contents
Index Fund vs ETF: Key Differences
| Factor | Index Funds | ETFs |
|---|---|---|
| Investment Strategy | Passive | Passive |
| Expense Ratio | Low | Low |
| Trading | End of Day | Intraday |
| Minimum Investment | High | Low |
| Tax Efficiency | High | High |
| Transparency | Low | High |
| Liquidity | Moderate | High |
| Cost of Trading | No trading fees | Commission fees |
| Management | Professional manager | Self-managed |
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.
Consider reading: Types of Mutual Funds in India
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):
- 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.
- Professional management: ETFs are managed by professional investment firms, which can help to reduce the time and effort required to manage a portfolio.
- Low costs: ETFs typically have lower fees than actively managed mutual funds, which can help to increase returns over the long term.
- Transparency: ETFs provide investors with transparency about the assets in the fund, as well as the fund’s performance and holdings.
- 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.
- 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.
- 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 NAME | NAME | SYMBOL | Underlying Index | LAUNCH DATE |
|---|---|---|---|---|
| Edelweiss AMC | Edelweiss Exchange Traded Scheme – NIFTY | NIFTYEES | NIFTY 50 Index | 8-May-15 |
| ICICI Prudential AMC | ICICI Prudential NIFTY ETF | ICICINIFTY | NIFTY 50 Index | 20-Mar-13 |
| Kotak AMC | Kotak NIFTY ETF | KOTAKNIFTY | NIFTY 50 Index | 2-Feb-10 |
| Motilal Oswal AMC | MOSt Shares M50 | M50 | NIFTY 50 Index | 28-Jul-10 |
| Quantum AMC | Quantum Index Fund – Growth | QNIFTY | NIFTY 50 Index | 10-Jul-08 |
| Religare AMC | Religare Invesco NIFTY ETF | IVZINNIFTY | NIFTY 50 Index | 13-Jun-11 |
| SBI AMC | SBI ETF NIFTY | SETFNIF50 | NIFTY 50 Index | 23-Jul-15 |
| UTI AMC | UTI NIFTY ETF | UTINIFTETF | NIFTY 50 Index | 3-Sep-15 |
| Birla Sun Life AMC | Birla Sun Life NIFTY ETF | BSLNIFTY | NIFTY 50 Index | 21-Jul-11 |
| ICICI Prudential AMC | ICICI Prudential CNX 100 ETF | ICICINF100 | NIFTY 100 | 20-Aug-13 |
| Kotak AMC | Kotak Banking ETF | KOTAKBKETF | NIFTY Bank | 4-Dec-14 |
| SBI AMC | SBI ETF Banking | SETFNIFBK | NIFTY Bank | 20-Mar-15 |
| Motilal Oswal AMC | MOSt Shares M100 | M100 | NIFTY Midcap 100 | 31-Jan-11 |
| SBI AMC | SBI ETF NIFTY Junior | SETFNN50 | NIFTY Next 50 | 20-Mar-15 |
| Kotak AMC | Kotak PSU Bank ETF | KOTAKPSUBK | NIFTY PSU BANK | 8-Nov-07 |
| ICICI Prudential AMC | ICICI SENSEX Prudential Exchange Traded Fund | ICICISENSX | S&P BSE Sensex | 10-Jan-03 |
| UTI AMC | UTI Sensex ETF | UTISENSETF | S&P BSE Sensex | 3-Sep-15 |
| Reliance Nippon Life Asset Management Limited | Reliance ETF NIFTY BeES | NIFTYBEES | NIFTY 50 Index | 28-Dec-01 |
| Reliance Nippon Life Asset Management Limited | Reliance ETF NIFTY 100 | NETFNIF100 | NIFTY 100 | 22-Mar-13 |
| Reliance Nippon Life Asset Management Limited | Reliance ETF Bank BeES | BANKBEES | NIFTY Bank | 27-May-04 |
| Reliance Nippon Life Asset Management Limited | CPSE ETF | CPSEETF | NIFTY CPSE Index | 28-Mar-14 |
| Reliance Nippon Life Asset Management Limited | Reliance ETF Dividend Opportunities | NETFDIVOPP | NIFTY Dividend Opportunities 50 | 15-Apr-14 |
| Reliance Nippon Life Asset Management Limited | Reliance ETF Consumption | NETFCONSUM | NIFTY India Consumption | 3-Apr-14 |
| Reliance Nippon Life Asset Management Limited | Reliance ETF Infra BeES | INFRABEES | NIFTY Infrastructure | 29-Sep-10 |
| Reliance Nippon Life Asset Management Limited | Reliance ETF Junior BeES | JUNIORBEES | NIFTY Next 50 | 21-Feb-03 |
| Reliance Nippon Life Asset Management Limited | Reliance ETF PSU Bank BeES | PSUBNKBEES | NIFTY PSU BANK | 25-Oct-07 |
| ICICI Prudential AMC | BHARAT 22 ETF | ICICIB22 | S&P BSE BHARAT 22 index | 28-Nov-17 |
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.
Consider using our Mutual Fund SIP Calculator to check the return on your mutual fund investments.
Features of an Index Fund
Here are some key features of index funds:
- Diversification: Index funds provide investors with exposure to a diversified portfolio of stocks or other assets that represent a broad market or sector. This can help to reduce risk and increase the potential for returns.
- Professional management: Index funds are managed by professional investment firms, which can help to reduce the time and effort required to manage a portfolio.
- Low costs: Index funds typically have lower fees than actively managed mutual funds, which can help to increase returns over the long term.
- Transparency: Index funds provide investors with transparency about the assets in the fund, as well as the fund’s performance and holdings.
- 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.
- 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.
- 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 Name | Benchmark |
|---|---|
| Aditya Birla Sun Life Index | NIFTY 50 Total Return Index |
| DSP Nifty 50 Index Fund | NIFTY 50 Total Return Index |
| DSP Nifty Next 50 Index Fund | NIFTY Next 50 Total Return Index |
| Franklin India Index NSE Nifty | NIFTY 50 Total Return Index |
| HDFC Index Fund Nifty 50 Plan | NIFTY 50 Total Return Index |
| HDFC Index Sensex | S&P BSE Sensex Total Return Index |
| ICICI Prudential Nifty Index Fund | NIFTY 50 Total Return Index |
| ICICI Prudential Nifty Next 50 Index Fund | NIFTY Next 50 Total Return Index |
| ICICI Prudential Sensex Index Fund | S&P BSE Sensex Total Return Index |
| IDBI Nifty Index | NIFTY 50 Total Return Index |
| IDBI Nifty Junior Index | NIFTY Next 50 Total Return Index |
| LIC MF Index Nifty | NIFTY 50 Total Return Index |
| LIC MF Index Sensex | S&P BSE Sensex Total Return Index |
| Motilal Oswal Nifty Bank Index Fund | NIFTY Bank Total Return Index |
| Motilal Oswal Nifty Midcap 150 Index Fund | NIFTY Midcap 150 Total Return Index |
| Motilal Oswal Nifty Smallcap 250 Index Fund | NIFTY Smallcap 250 Total Return Index |
| Nippon India Index Nifty | NIFTY 50 Total Return Index |
| Nippon India Index Sensex | S&P BSE Sensex Total Return Index |
| SBI Nifty Index | NIFTY 50 Total Return Index |
| Tata Index Nifty | NIFTY 50 Total Return Index |
| Tata Index Sensex | S&P BSE Sensex Total Return Index |
| Taurus Nifty Index | NIFTY 50 Total Return Index |
| UTI Nifty Index | NIFTY 50 Total Return Index |
| UTI Nifty Next 50 Index Fund | NIFTY Next 50 Total Return Index |
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:
- 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.
- 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.
- 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.
- 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.
