in “Take the first step in faith. You don’t have to see the whole staircase, just take the first step.” – Martin Luther King
After scrutinizing for ages, if you have finally decided to kick start your investing career, then getting an idea about Index funds and Exchange Traded Funds is a must. The simplest and quickest way to start investing is to get an index fund or Exchange Tr
Although, both are different ways to invest in a similar portfolio of shares yet there are subtle differences between these two. Most of the budding investors often get confused over the differences and the confusion is quite natural as both are passively managed investments. Once you are clear with the differences, we will throw some light on which one is better. Let’s cut to the chase and hack these differences into bits.
Exchange-Traded Funds Vs Index Funds: An Overview
Exchange-Traded Fund is an investment fund made up of stocks making a particular index like Sensex or Nifty. Each and every stock would have the same value as it has on the index. Whereas, an Index Fund, on the other hand, is more of like a mutual fund or even an ETF designed to follow any specific industry. These can be large scale or small scale companies or companies separated by industry.
Considered over most mutual funds when it comes to flexibility and convenience, ETFs can be traded easily than index funds and traditional mutual funds. The enticing point to top it off is ETFs have lower investment minimums than index mutual funds making it feasible for beginner investors.
Let’s dive a bit deeper into ‘what are Exchange Traded Funds and Index Funds?’ before we get into the differences and similarities of both.
Exchange-Traded Funds: What’s There to Learn for a Beginner?
- Exchange-Traded Funds are nothing but investment fund that operates on the stock exchange holding assets such as stocks or bonds and can be bought or sold on an open exchange.
- Easy to understand, convenient and flexible than most of the mutual funds
- Can be bought in smaller sizes and better than mutual funds when it comes to complexity aspect
- ETFs are generally more tax-efficient than Index Funds
- In a nutshell, they have features similar to trading stocks
Index Funds: Basics for a Budding Investor
- Index funds are more of like mutual funds that track a particular market index, wherein, you can invest lumpsum or periodically through SIP. The only difference being the portfolio created by the fund manager that exactly replicated an index (Sensex or Nifty)
- Index funds follow a passive investment strategy
- Usually referred to the funds that invest and tracks a particular & bigger market index – for instance, Sensex or the Nifty
- Index funds are considered as the ideal investment for investors who are looking forward to building a haven for their golden years. Even the epitome of investment, Warren Buffet, recommends index funds as the best way to invest and save to fulfill your retirement goals
ETF vs Index Funds: Key Differences
| ETF | Index Funds | |
| 1 | Funds that track index of any particular exchange. | Funds similar to mutual funds that track a particular market index. |
| 2 | It is generally traded like stocks | They are more like Mutual Funds |
| 3 | ETFs are usually easier to trade | You might face some hurdles while investing in Index funds |
| 4 | The pricing for ETF happens throughout the trading day. | Index funds are usually priced at the closing of the trading day. |
| 5 | Trading Fees is quite high for ETF; Expense Ratio falls in the spectrum of 0.1-0.5%, adjusted to price. | There is no transaction fees or commission for Index funds |
| 6 | ETF’s pricing depends on the demand and supply of securities in the market | Index funds’ pricing is fixed as per the NAV (Net Asset Value) of the underlying asset. |
| 7 | Expense ratio is quite low | Expense Ratio is comparatively high |
| 8 | ETFs don’t demand any minimum investment | You might have to spend a small amount of money or purchases in regular investments through SIP. |
Some Top ETFs and Index Funds to Consider
Below we have enlisted some of the well-known ETFs and Index funds as per the market scenario.
| Exchange Traded Funds | Index Funds |
| Birla Sun Life Nifty ETF | Birla Sun Life Index Fund |
| Edelweiss ETS – Banking | DSP BlackRock Equal NIFTY 50 Fund |
| Edelweiss Exchange Traded Scheme – Nifty | Franklin India Index Fund – NSE Nifty Plan |
| Edelweiss Exchange Traded Scheme Nifty Quality 30 – Growth | HDFC Index Fund – Nifty Plan NIFTY 50 |
| HDFC Nifty ETF | ICICI Prudential Nifty Index Fund |
More Detailed Information
Conclusion
As the famous saying goes, ‘every advantage has its disadvantage’ one can say that both ETFs and Index funds have their pros and cons. Both are very convenient tools for investing in a variety of assets. It all boils down to the amount of investment and risk factor of the investor. Although Exchange Traded Funds and Index Funds have a plethora of points that prove their similar nature, still some subtle differences mark a thin line in between. The two most important factors you should consider while choosing between ETF and Index funds are costs and liquidity. Once you have analyzed which one is the best fit for you based on these factors, you are good to go. Inexperienced investors should be well aware of all the aspects and do the research well before investing.
