Difference between Index and ETF funds
Index funds are known to follow an investment strategy passively, which does not beat the benchmark, but rather replicate it and just for an expense ratio of 0.5% or less it passively tracks stocks and the stock allocation accurately. An index fund costs less when compared to costs of an actively managed fund, where you may have to pay anywhere between 1-2.5%. Index funds are a suitable option only if you are a risk-averse investor but are looking to participate in equity markets.
An Exchange-traded fund or an ETF consists of all types of investments including bonds, stocks and commodities. They track a specific index and then design securities which are tax-efficient, come at a low-cost, and have other features of a trading stock to benefit investors. Compared to mutual funds ETFs are more efficient because the buying and selling occur through the exchange.
Here are a few differences between ETFs and Index funds
An index fund tracks the performance of a benchmark index of the market whereas an exchange-traded fund tracks the stock market index. An index fund gets priced at the end of a trading day and pricing depends on the funds NAV whereas ETFs takes place throughout the trading day and the pricing depends on the demand and supply of securities in the market. The trading fee when the expense ratio is compared, an ETF’s ratio ranges from 0.1-0.5% whereas index funds don’t have a transaction fee or commission.
If you are a first-time investor the minimum amount ETFs need is ₹10,000, and index funds need ₹5,000. ETFs do not charge any exit load, though management fee and taxes are charged; and index funds do charge management fee and the exit load applies only if you liquidate it prior to its maturity. You do not need a trading account if you invest in an index fund though you’d need one for trading for an exchange-traded fund. The transaction on an ETF takes about three days for the settlement and an index fund takes just a day. ETFs are directly traded on an open market whereas an index fund is routed through a fund manager. Index funds cannot be sold short, they generally offer more stability for conservative investors. ETF’s are not directly associated with the NAV so they reflect the real-time environment of the market. When you decide to invest you can pick any of these funds keeping in mind your investment objective and risk appetite.