Index Funds Vs ETFs 🙅♀️
Read this 1 Page to know which one is better for you?
Index Fund: Index Funds are a type of mutual investment instrument that matches the portfolio of a certain index. One can buy and sell Index Fund at the day’s end NAV which is calculated based on the weighted average price.
Exchange Traded Funds (ETF): Unlike mutual funds, ETFs trades like a stock through a registered broker of a recognised stock exchange or directly from the Asset Management Company. The live NAV fluctuates with the market movements of the constituents.
The Difference: While Index Funds and Exchange Traded Funds (ETFs) look similar, there are important differences you need to keep in mind before investing in either of them.
Index Funds can be bought/sold like any other open-ended MF at the day end NAV (Net Asset Value) from the AMC. ETFs can be bought like a normal stock during trading hours at the real time NAV/Traded Price or iNAV.
Expense Ratio of ETF is less than Index Funds, but ETF has additional brokerage expense. Brokerage needs to be paid while buying/selling ETF through a broker on the exchange. Hence, expense ratios can not be compared directly between them.
Bid-Ask Spread – ETF may not have enough volumes and hence, the traded price may be different from the live NAV resulting in additional cost.
In ETF, demat is mandatory while it is optional for Index Funds.
Index Funds allow SIP, SWP, STP but ETF’s don’t have these features. (Few portals provide SIP in ETF)
How does AMC ensure that Traded price is close to live NAV?
By creating awareness about the ETFs to create secondary market liquidity. AMC’s appoint market makers, who quote buying/selling prices on the exchange to keep traded price close to live NAV.
What should retail investors choose between Index & ETF?
We feel retail investor looking for long term investment should stick to Index Funds over ETFs as Index Funds are simpler and don't have liquidity issues like ETFs.
What to look for in Index Funds before investing?
Choice of Index – Sensex, Nifty, Nifty next 50 etc.
Expense Ratio – Lower the better.
Tracking differences & errors – Lower the better.