Mutual Funds

What is the Difference Between Index Funds and ETFs?

By admin
15 November 2024
3 mins read

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What is the Difference Between Index Funds and ETFs?

If you want to invest in passive mutual funds where you don't have to actively manage your portfolio, index funds and ETFs can be a smart choice. These passive funds are managed by professional fund managers who invest in securities that replicate the market benchmark index.

These funds don't aim to beat the market and make for excellent passive investment streams. Let's explore ETF and index funds in detail and understand their key differences.

What are ETFs?

Exchange Traded funds (ETFs) typically trade in intraday shares and realise gains at the end of the day. They comprise a variety of asset classes, such as stocks and bonds, and track the benchmark index. ETFs are traded on stock exchanges like standard company shares. Investors must have active trading and demat accounts to invest in ETFs.

What are index funds?

Index funds are similar to ETFs and invest across different asset classes, like stocks, commodities, and bonds. They track benchmark indices like SENSEX 100 or NIFTY 50, allowing investors to invest in risky securities with lower risk. This is because the value of index funds doesn't fall below the benchmark despite market fluctuations.

However, a critical difference between ETF and index funds is that you don't need demat and trading accounts to invest in index funds.

ETF vs index fund: What is the difference?

Let's look at the difference between ETF and index funds in detail so you can make well-informed investment decisions:

Factor	ETF	Index fund
Investment requirements	Investors must have active demat and trading accounts.	Investors only need to be KYC-compliant.
Trading flexibility	ETFs can be bought or sold at prevailing market prices throughout the trading day.	Index funds are priced once a day when the market closes.
SIP investment	Does not support SIP investments.	Investments can be made through SIPs for a fixed lock-in period.
Redemption process	Investors can buy and sell these funds on the secondary market at prevailing market prices.	These funds can only be redeemed through the mutual fund house at the closing NAV.
Expense ratio	Lower expense ratios.	Comparatively higher expense ratios.
Cost of investment	Typically lower than index funds but include other expenses like GST, stamp duty, STT, brokerage, etc.	Higher cost of investment than ETFs but lower than actively managed funds.
Valuation of funds	Continuous fund valuation.	Valuation is done at the end of the day.

Wrapping Up

Despite the several ETF and index funds differences, these are excellent options for investors seeking passive investment avenues to grow their wealth. However, to select the best option, it's essential to consider your investment horizon, risk tolerance, and financial goals.

You can also avail of expert guidance with Tata Capital Moneyfy and explore a variety of ETFs and index funds to identify options that align with your investment style.

Begin your investment journey securely with Tata Capital Moneyfy. Visit the official Tata Capital Moneyfy website or download the mobile app to know more.