Difference between Exchange Traded Funds (ETF) and Index Funds
Both these funds are designed to track the performance of an index.
As a wise investor, you need to compare the differences between both these mutual fund schemes
If you are a regular mutual fund investor, you know the different schemes available with this investment option. You can choose the right one based on your investment objectives and financial situations. Nowadays, many people prefer passive mutual funds like Index Funds and Exchange Traded Funds (ETF) to invest their money because of its low expense ratio and diversified portfolio. Both these funds are designed to track the performance of an index. For an average investor, these two schemes look similar, but these funds different in many aspects. Let us check the difference between index funds and ETFs and which one suitable to fulfill your investment goals.
Index funds
Index funds have been a popular choice for many people for a few years because of its diversified portfolio and low expense ratio. Many investors prefer this fund as they believe that these funds are an important force in the field of investment and can stand the test of time. Index funds are a type of mutual fund, but in this scheme, the portfolio manager buys the holdings in the index and tries to replicate the returns of the index that it follows. The holdings of these funds will not change unless its index changes. Since each share of index funds deposits in a single index, these funds can offer a high level of diversification. It helps investors to enjoy good returns with reduced risks.
Exchange traded funds (ETF)
Like index funds, ETFs are also gaining popularity among investors in recent years. These are index funds but usually traded like stocks on exchanges. One of the great attractions of this fund is it provides great exposure to investors to the stock markets. These funds consist of stocks and can make a particular index like that of Nifty or Sensex. In short, ETFs can buy and sell like a stock over stock exchanges. Designed mainly to monitor the performance of an index, ETFs give access to an investor to a wide range of asset types, markets, and segments. Like index funds, these funds are also passively managed where its securities in the portfolio are like a basket of securities designed to duplicate an index.
Difference between ETF and Index Funds
| Index Funds | Exchange Traded Funds |
|---|---|
| Expense ratio is higher and less tax efficient | Expense ratio is lower than index funds and more tax efficient |
| Pricing is based on the NAV of the underlying asset | Pricing is based on the demand and supply of the stock/security in the market |
| Replicating the performance of a benchmark market index | Tracking indexes of a particular exchange |
| Index funds can buy and sell only during the trading hours at the end of the day NAV. Disclose their holdings on periodic basis | ETFs cab buy and sell at a price based on the exchange fraction. Disclose their holdings on daily basis |
| Need to choose a growth plan or dividend reinvestment plan for dividends | Dividends credit to your bank account |
| Allow shareholders to automatically reinvest their dividends, without paying any commission. | ETFs usually do not allow shareholders to reinvest their dividends. Even if they allow such service, they may not be efficient. |
Both the Index funds and ETFs follow an underlying benchmark index for investing money for making high returns. These funds are capable of beating many actively managed mutual fund schemes in the long run. Index funds and Exchange Traded funds are not designed for a peculiar benchmark index or to outshine the market. As a wise investor, you need to compare the differences between both these mutual fund schemes before making an investment choice. Also, evaluate the costs and liquidity of these funds before choosing the right one for your investment needs.
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.
With this one can say “Mutual Fund Sahi hai”, so let me do Nivesh