Diversification is probably the important strategy when it comes to investments, and you will hear financial experts reiterating this fact over and over. Diversification refers to spreading your investments across various assets to reduce your risks.
Index Funds and ETFs are great for diversifying your portfolio. They offer you broad market exposure and have comparatively lower transaction costs and expense ratios compared to other investment options.
Let’s understand what these are and the key differences between exchange-traded funds and index funds.
An Index Fund is a type of mutual fund that replicates a specific market index performance. This could be a replication of indices like S&P 500, NIFTY 50 OR FTSE 100. The goal of this type of fund is to match the returns of the index by holding the securities in that index.
When you buy shares of any index fund, you are buying a small part of all the assets in that index, and you gain proportional ownership in the fund’s portfolio. Index funds are generally managed passively and are considered to be long-term investments.
An Exchange Traded Fund (ETF) is a type of fund that holds assets like stocks, commodities, bonds or a combination of these. They track the performance of a particular sector, index or assess class. These are traded on the stock exchange through the day similar to individual stocks.
When you choose to invest in an ETF, you purchase shares of the fund during trading hours. You can buy and sell ETFs at any time during a specific trading day.
Index funds and ETFs have many differences. Some of the most important differences among the investment options are:
| Features | Index Funds | Exchange-Traded Funds (ETFs) |
| Trading | Trading is done after the market closes. There is no intraday trading. | ETFs are traded throughout the day. Allows intraday trading. |
| Pricing | They are priced once a day based on the end-of-day Net Asset Value (NAV) | Prices fluctuate based on supply and demand. |
| Management | Usually passively managed as they replicate the performance of a specific index. | ETFs can be managed both passively and actively. |
| Expense Ratio | Have a higher expense ratio. | Have a lower expense ratio. |
| Investment Type | Supports Systematic Investment Plans (SIPs). | Generally, does not support SIPs or automatic investment plans. |
| Access to Asset Classes | Track broad market indices. Specialised investments are not possible. | There is a wide range of ETFs including those targeting specific sectors and markets. |
Before you choose between index fund or ETFs you must consider your preferred investment style and strategy. If you are interested in actively trading and monitoring changes in the market, an ETF would be a better choice. Whereas if you are looking for a passive investment option that you can maintain in the long term, consider investing in an index fund.
Regardless of your choice between index funds vs. ETFs, ensure that you invest through a reliable and reputed financial platform such as Tata Capital Moneyfy. Our user-friendly platform makes it easy for you to invest in your financial future and supports all your investment strategies.
Download the mutual fund app Tata Capital Moneyfy today!
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28 October 2024
3 mins read
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