Welcome to Gift-Nifty, where you can explore what is ETF vs Index Funds. When investing in mutual funds, it can be hard to figure out which ones to pick because there are so many types and how to find the right mix of stocks in each one. These days, you can’t help but think about the results for ETFs vs. index funds.
There are a lot of differences between these two passively managed funds in terms of how they work. They both try to mirror the performance of an underlying index and offer built-in diversification in stocks.
This blog post will explain what ETFs and index funds are and give you more information about ETFs vs. index funds.
What Are ETFs?
ETFs are products that can be bought and sold on the market that follow an index, like Nifty 50, Nifty 100, etc.
These passive instruments try to copy the success of the underlying index by putting money into stocks with the same weightage as the index.
During the trading day on a stock exchange, prices change in real time to represent the demand and supply in the market. At the market price, you can buy or sell these funds.
It’s possible to buy different kinds of ETFs, like currency ETFs, bond ETFs, commodity ETFs, sectoral ETFs, and foreign ETFs.
For investors who want to diversify their portfolio and get the same returns as the underlying average, ETFs are a good choice. People who like having their money quickly can also invest in ETFs.
What Are Index Funds?
Index funds are a type of mutual fund that keeps up with the success of an index.
When you buy stocks in these inactive mutual funds, the fund manager buys them all at the same weight and only changes them when the stocks or the blend of stocks changes.
Because of the tracking error, these passive mutual funds don’t give the same returns as the average they’re based on.
This is because of the different fees that come with managing these funds, like transaction fees, promotion costs, and so on.
The lower cost ratio of these funds is because the fund manager doesn’t pick as many stocks as they do with actively managed mutual funds like equity funds.
Index funds are good for people who are new to investing in the stock market and want to spread their money around among several stocks to lower their general risk.
Key Differences of ETF Vs Index Funds
Here are some key differences Between ETF vs Index Funds:
| Points of Differences | ETFs | Index Funds |
|---|---|---|
| Pricing | The price of an ETF changes all day long, just like the price of a stock. | Index funds are priced based on their NAV, or Net Asset Value. The AMC puts out the NAV at the end of each day. |
| Listing on the Stock Exchange | The stock market has a list of ETFs. | There is no list of index funds. |
| Liquidity | At the current market price, they are simple to buy and sell at any time. | When the cut-off times come around, index funds can only be bought and sold at the NAV. But it must be easy for you to sell the units. |
| Need of a Demat account | In order to keep the ETF certificates, you must have a Demat account. | To keep the ETF certificates, you must have a Demat account. |
| Availability | The stock market has a list of ETFs that can be bought and sold like stocks. | The website of the mutual fund house or the website of a stockbroker, like Dhan, can help you find index funds. |
| SEBI Rules | ETFs have to put at least 95% of their money into stocks that are in a certain group. | For index funds, the minimum percentage rule stays the same, at 95%. |
| Analysis Required | Because the price of an ETF changes all the time, you can keep looking at it. | Because their NAV doesn’t change every second, you don’t have to keep looking at index funds. |
| Intraday Trading | For day dealing, ETFs can be bought and sold like stocks. | You can’t trade with index funds during the day. |
| Arbitrage | You can trade between the cash market and the futures market with ETFs. | Arbitrage does not happen with index funds. |
| SIP or Lumpsum | The ETF can be bought in large amounts, just like stocks. Dhan gives you the choice to use SIP to invest in ETFs. | In index funds, you can either put money in overtime (SIP) or all at once. |
| Presence of Tracking Error | When you buy ETFs, there is a tracking mistake. | Index funds are exposed to a tracking error. |
Conclusion
When dealing in mutual funds, it can be hard to pick the right ones because there are so many types and it can be hard to find the right mix of stocks. A lot of people choose ETFs and index funds because they try to replicate the success of an index and come with built-in diversification. ETFs are good for buyers who want to get to their money quickly because they can be bought and sold on the market at any time during the trading day. They offer real-time pricing and high liquidity. ETFs come in many forms, such as currency, bond, metal, sectoral, and foreign.
Also Read: Nifty BeES: Unlocking the Potential of Index Investing
On the other hand, index funds are mutual funds that follow an index. Their prices are set by their Net Asset Value (NAV) at the end of each trading day. They are great for people who are just starting or who want an easy, cheap way to spread out their capital. Investors can make smart decisions that help them reach their financial goals if they know the main differences between these two choices, such as price, liquidity, and trading freedom.
FAQs
What are ETFs?
ETFs are market-traded products that follow an index.
How do ETFs work?
ETFs replicate an index’s performance by investing in stocks with the same weightage.
What are index funds?
Index funds are mutual funds that track an index.
How do index funds work?
Index funds invest in stocks of an index and adjust only when the index changes.
Why do index funds have tracking errors?
Tracking errors occur due to management fees and transaction costs.