Financial Awareness Level
Index Fund vs ETFs: Top Differences Every Indian Investor Must Know
Introduction
Both Index Fund and Exchange Traded Funds (ETFs) are popular choices among passive investors. They aim to replicate the performance of a specific market index like the Nifty 50 or Sensex. However, while they may sound similar, there are important differences in how they are structured, traded, and accessed. In this guide, we break down the key differences between Index Funds and ETFs, especially for Indian investors looking to make informed investment decisions.
Quick Overview: What Are They?
- Index Fund: A mutual fund scheme that invests in the same stocks and in the same proportion as a specific index. It’s bought and sold at the day-end NAV (Net Asset Value). Index funds create a portfolio that mirrors a market index. Index funds are passively managed, which means that the fund manager makes only minor, periodic adjustments to keep the fund in line with its index. Hence, Index fund offers the same return and risk represented by the index it tracks.
- ETF (Exchange Traded Fund): A fund that also tracks an index but is traded on stock exchanges like shares. Its price fluctuates in real time during market hours. An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund.
Top Differences Between Index Fund and ETFs
| Feature | Index Fund | ETFs |
|---|---|---|
| Mode of Investment | Bought via AMC or mutual fund platforms | Traded on stock exchanges |
| Trading Time | Only once a day at NAV | Throughout the trading day at market price |
| Demat Account | Not required | Required to buy/sell ETFs |
| Liquidity | Lower than ETFs | High (can be bought/sold like stocks) |
| Expense Ratio | Slightly higher | Typically lower |
| Investment Method | Ideal for SIPs and lump sum through AMC | Requires market orders and broker interface |
| Pricing Transparency | NAV declared once daily | Real-time pricing available |
| Suitability | Long-term investors new to markets | Investors comfortable with demat and trading platforms |
ETF vs Index Fund – Which is Better for You?
It depends on your risk taking appetite and goals:
Choose an Index Fund if:
- You’re a beginner or prefer a hands-off approach
- You want to start SIPs without a demat account
- You are comfortable with end-of-day NAV pricing
Choose an ETF if:
- You already have a demat and trading account
- You want to trade flexibly and track prices live
- You prefer lower expense ratios and intra-day liquidity
- You are seeking returns similar to index and liquidity similar to stocks
However, for better understanding you may seek advice from your financial advisor.
Taxation for Both (in India)
- Both are treated as equity investments
- Short-term capital gains (STCG): 20% if held <1 year
- Long-term capital gains (LTCG): 12.5% on gains above ₹1 lakh after 1 year (You are recommended to seek advice from tax advisor before you take any/refrain from any action)
Conclusion
ETFs and Index Funds are both efficient, low-cost options for passive investing in India. While they aim for similar outcomes—replicating index performance—they differ in how they’re bought, traded, and managed. Your choice between ETF vs Index Fund should depend on your investment goals, comfort with trading platforms, and access to a demat account. Both can form a strong foundation for long-term wealth creation. (You are recommended to seek advice from Financial advisor before you take any/refrain from any action)
Additional links:
What is a Mutual Fund? - Beginner's Guide to Investing
AMFI - Introduction to Mutual Funds
What is an Exchange Traded Fund (ETF)
FAQ Section
What is the main difference between an ETF and an Index Fund?
ETFs are traded on exchanges like stocks in real time, while index funds are mutual funds purchased at the day-end NAV.
Which has a lower cost – ETF or Index Fund?
Generally, ETFs have a lower expense ratio, but may involve brokerage charges.
Do I need a demat account for both?
Only for ETFs. Index funds can be bought directly through AMC websites or mutual fund platforms.
Which is better for long-term investment?
Both are suitable. Index fund offers convenience, while ETFs offer cost efficiency and flexibility.
Can I switch from an Index Fund schemes to an ETF later?
Yes, but it involves redeeming the Index fund scheme and using proceeds to buy ETFs, which may have tax implications.
Is the return the same for both?
Returns are very similar as both track the same index, though slight differences may arise due to tracking error and costs.
Are ETFs riskier than Index Funds?
Not in terms of underlying assets, but ETF prices may fluctuate more due to real-time trading. (You are recommended to seek advice from Financial advisor before you take any/refrain from any action)
Where can I trade ETFs?
On stock exchanges (NSE/BSE) using your trading account via brokers. (You are recommended to seek advice from Financial advisor before you take any/refrain from any action)
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Visit https://www.hdfcfund.com/information/key-know-how to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website (www.sebi.gov.in/intermediaries.html). For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints directly with the AMCs. If they are not satisfied with the resolutions given by AMCs, they may raise complaint through the SCORES portal on https://scores.sebi.gov.in/scores-home/. SCORES portal facilitates investors to lodge complaint online with SEBI and subsequently view its status. In case the investor is not satisfied with the resolution of the complaints raised directly with the AMCs or through the SCORES portal, they may file any complaint on the Smart ODR on https://smartodr.in/login.
The information is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY
