What Are ETFs?
An index, such the Nifty 50, Nifty 100, etc., is tracked by exchange-traded funds, or ETFs.
Through the use of equities with the same weightage listed on the index, these passive instruments try to imitate the performance of the underlying index.
During a stock exchange’s trading day, prices fluctuate in real-time to reflect supply and demand in the market. At the going rate, you are able to purchase or sell these funds.
Equity, currency, bond, commodity, sectoral, and foreign ETFs are among the several kinds of exchange-traded funds (ETFs).
Investments in exchange-traded funds (ETFs) are appropriate for those seeking to achieve the same returns as the underlying index while benefiting from portfolio diversity. ETFs are another option for investors that favor liquidity.
What Are Index Funds?
Mutual funds that track an underlying index’s performance are known as index funds. The fund manager in these passive mutual funds purchases stocks at the same weight and switches them out only when the stock or composition does.
Due to tracking error, these passive mutual funds do not produce returns that are comparable to those of the underlying index. This is a result of the many fees associated with managing these funds, including transaction fees and promotional expenses.
Because the fund manager has less say over stock selection than with other actively managed mutual funds, such as equities funds, these funds have a lower fee ratio. Investing in multiple equities at the same time can reduce total risk, which makes index funds a good option for novice stock market investors.
ETF Vs Index Funds: Key Differences
Here are the main differences between ETFs and index funds:
| Points of Differences | ETF’s | Index Funds |
| Pricing: | Like stocks, exchange-traded funds (ETFs) have a price that fluctuates during the trading day. | The NAV, or net asset value, is used to price index funds and is revealed by the AMC at the end of each trading day. |
| Exchange listing: | The stock exchange has ETFs listed. | Index funds do not have a listing. |
| Availability of liquids: | At the going rate in the market, they are simple to purchase and sell. | Only at the NAV in accordance with the cut-off times are index funds bought and sold. However, it’s likely that you can sell the units quickly. |
| Accessibility: | Trade ETFs like stocks by finding their list on stock exchanges. | Alternatively, you can look out index funds on the websites of stockbrokers like Dhan or mutual fund houses. |
| SIP or Lump Sum: | The ETF can be purchased in bulk, much like stocks. Dhan gives you the choice to make SIP investments in ETFs. | You can make lump sum or SIP investments in index funds. |