Both index funds and ETFs (Exchange Traded Funds) are passive funds, which means the money in these funds does not follow the strategy of any fund manager who actively shuffles around investments for optimal gains. On the contrary, these funds mirror the investment pattern of some chosen benchmark index and continue to follow them, reflecting the broad trend in that particular segment.
However, there are significant differences between these categories of funds.
First, those investors who cannot find the time and energy to track how their funds are performing can choose to invest in passive funds. One distinct advantage of index funds is that the risk is lower in this category of mutual funds.
Investment strategist Nilanjan Dey says that index funds are gaining popularity on the foundations of transparency, simplicity and affordability.
Index funds are open-ended schemes, where an investor can put in and pull out investments at will.
Recent AMFI (Association of Mutual Funds in India) data tell us that at the end of May, there were as many as 217 index funds and the number of folios in them stood at 83.63 lakh. The total AUM managed by index funds was more than Rs 2.26 lakh crore.
Need for demat account
Exchange traded funds (ETFs) are also rapidly becoming popular. The main difference between index funds is that ETFs are listed on the stock exchanges like stocks. ETFs, too, replicate a particular index.
Therefore, investors need a demat account to invest/trade in ETFs. There is no such requirement for index funds.
Index funds: No SIP in this one
ETFs unlike index funds, don’t allow investment through Systematic Investment Plans (SIP).
Index funds have low expense ratios compared to actively managed funds. But ETFs have even lower expense ratios than index funds.
ETFs allow continuous valuation of funds while the valuation of index funds is usually done at the end of the day like any mutual fund.
Suitable for whom?
The view of Groww, the biggest online broking firm with more than 95 lakh investors in FY24, ETFs bear more risk than index funds.
The immediate corollary is, those who have a bigger risk appetite should go for ETFs.
For investors who wish to take less risk, index funds are obviously a more appropriate choice.
Both ETFs and index funds are passive funds and both are becoming increasingly popular with investors. Yet there are significant differences between them. Business Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
