Mutual Fund Club

ETFs & Index Funds

ETFs & Index Funds

• ETF stands for Exchange traded fund. These are a type of investment funds
that tracks an index, a commodity, bonds or basket of assets.
• Think of it as a Mutual Fund that you can buy and sell in real-time at a price
that changes throughout the day. ETFs typically have lower fees than mutual
funds, making them an attractive alternative for individual investors.
• Index funds are mutual funds, which follow indices like BSE Sensex and
Nifty. These funds are passively managed funds and their performance is
judged purely on replication of an index.
• There are more than 120 Index/ETF options available to choose in India
Pros & Cons
• Lower Cost: Major benefit of Index Funds is
their very low cost structure. Their expense
ratios are among the lowest among Equity
Funds, it ranges from 0.1%-1%.
• Lower Risk: Index Funds follow an index and
hence are not dependent on Fund
Manager’s decision making. No biasness.
• Diversification: Index Funds give you instant
diversification in all stocks of the underlying
Index.
• Easy to choose: Since Index Funds simply
track an index, you just need to finalize a
fund with least tracking error.
• Lesser Flexibility: Fund Manager just has to
follow the changes in Index; he/she does not
have any flexibility to change the portfolio.
• Average Returns: These are not very popular
in India, as most of the active fund managers
easily beat Index returns. But things are
looking better in future.
• Stuck with certain stocks even though they
are out of favour: Till the time leading Index
holds these stocks, you are stuck with these
even though you know these are not going
to perform.
Index Funds vs ETFs
Basis Index Funds
Structure These keep higher percentage of assets as Cash
and equivalent to manage redemptions etc.
This leaves tracking error, higher the error
greater the deviation from Index returns.
ETFs
These too hold some cash or equivalent for liquidity
but it is much lesser than Index Funds. These track the
Index more efficiently than Index Funds.

Transaction You can buy or sell them like any other mutual As the name suggests, they are bought and sold on
fund. You can also do systematic transactions exchange and need a Demat account to execute
(SIP, STP, SWP) transaction.

Charges Though lesser than other Equity Funds, they do ETFs have very low fund management charges and you
have some fund management charges like just need to pay your regular brokerage and Demat
other Mutual Funds account charges

Liquidity No liquidity risk as Fund house would invest High liquidity risk as one ETF unit is bought and sold as
directly in the underlying index stocks single stock and since ETFs are not very popular in
India, trading volumes are very low which leads to
liquidity risk.
ETF & Index Funds Types in India
Types ETF Examples Index Fund Examples
Index : Oldest and most common type of ICICI Prudential Nifty ETF reflects ICICI Pru Nifty Next 50
ETFs/Index Funds today. They acquire Nifty 50 Index Index Fund
stocks/shares in amounts that proportionately Kotak NV20 ETF reflects Nifty HDFC Index Fund-Sensex
reflect an existing stock index. Goal of the fund is NV20 Index.
to emulate the index it reflects and not
outperform it

Commodity : These ETFs invest in commodities Reliance ETF Gold BeES SBI Gold Fund
such as Gold, Silver etc. Currently, only Gold ETFs
are available in India. Prices of Gold ETFs move
hand in hand with Physical Gold.

Bond: These ETFs invest in bonds. When the stock LIC MF G-Sec Long-Term ETF Bharat Bond FoF
market shows its downward swing, these ETFs are which reflects Nifty 8-13 years G-
in demand. Sec Index & Bharat Bond ETF
International: These ETFs invest in Foreign index Motilal Oswal NASDAQ 100, Motilal Oswal S&P 500
such as MSCI global index, NASDAQ etc. which reflects Nasdaq 100 index. Index Fund
THANK YOU