INDEX FUNDS VS ETFS

2 minutes read / June 02, 2021 / By @1PageFinance

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.

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 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.

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