The fundamental difference between an index fund and an exchange-traded fund is that an index fund is a sort of mutual fund, whereas an exchange-traded fund operates more like the operations of stocks and allows for day-to-day buying and selling. However, you also need to note that the trading of ETFs is only possible if the market has enough liquidity.
This article covers:
- Difference Between ETF And Index Fund
- Best ETF In India
- Best Index Mutual Funds
- ETF Vs Index Fund India- Quick Summary
- ETF Vs Index Fund India- Frequently Asked Questions
Difference Between ETFs And Index Funds
The major difference between ETFs and Index Funds is that index funds can be traded at the end of the trading day at a set price, whereas ETFs perform similarly to the stocks in the share market, and you can trade them throughout the day.
ETF Vs Index Fund: In terms of Dividend Income
Whenever the dividends are issued to the index fund investors, the dividend income is spontaneously reinvested into the fund. Due to this particular feature of the index fund, the investors are able to receive the maximum amount of compound growth from their investments.
All the dividends received in the ETF get collected until the quarter ends, and then these dividends are distributed among the shareholders in the form of ETF units or sometimes cash. However, you also need to note that you will need to pay fewer taxes on your dividends if you have invested in an ETF.
ETF Vs Index Fund: In terms of Tax Efficiency
For the capital gains you have received from selling the units of both the ETF and index fund, you are required to pay taxes.
An index fund, as its name suggests, closely follows a specific stock market index which means its portfolio gets adjusted regularly through purchasing and selling assets. In this case, the taxes for the capital gains are withdrawn from the fund, which means the NAV or Net Asset Value of the fund also gets regulated.
ETF Vs Index Fund: In terms of Returns
Investment tools like index funds and ETFs are managed passively. There is no active human team involved in both cases, and these funds don’t necessarily try to beat the current market instead, they only try to imitate the same to receive optimal returns. Both ETF and index funds replicate the stock market index such as BSE Sensex, India VIX, Nifty 50, etc.
If we look at the previous market records, then ETF and index funds, both passively managed financial instruments, have been able to successfully overtake actively managed mutual fund schemes if invested for a significantly longer period of time.
A professionally active fund manager has the ability to select outstanding stocks that can perform relatively well in the market and offer the investors huge returns over a short period of time, but when you are investing for a decade or more, then it is extremely difficult to sustain individual winning records for the fund managers.
According to BSE India, over 65% of the actively managed funds have not been able to perform well in the market in the last 10 years (December 2020 being the last year). On the other hand, the Nifty 50 index has showcased a return of 13.5% per annum from June 1999 to February 2021. Although the returns may not be consistent every single year, however, over the years, you will be able to receive handsome returns from both of these funds.
ETF Vs Index Fund: Charges Involved
For an index fund, the investor will have to bear something called an expense ratio in which multiple charges are taken into account. Moreover, the recurring charges for index funds remain between 1% to 1.8%. Even if you are not selling any units, you will be liable to pay the expense ratio, and in case you are trying to exit the index fund within a specified period, then you will have to pay an additional charge in the form of exit load.
If you have invested in an ETF, then you won’t have to pay any kind of recurring charges. Although the annual maintenance charge of the Demat account is mandatory for every investor and trader. For ETF trading, you will also have to pay the transaction charges which are limited to less than 5%.
ETF vs Index Fund: Trading Style
Index funds are basically mutual funds that can be best utilized if you are investing for the long term. Completing a mutual fund KYC will be sufficient for investing in index funds.
ETFs have multiple features such as order limits, intraday trading, stop losses, etc., which makes it an ideal investment tool for investors who are looking forward to taking advantage of the market timing and are not focused on long-term investment returns. It is mandatory to have a Demat account if you want to invest in ETFs (because of its trading feature).
ETF vs Index Fund: In terms of Liquidity
With an index fund, you won’t have to be worried about liquidity because when you invest in a specific index fund, the fund house directly adds the money to the AUM or Asset Under Management, and the fund manager can use the funds accordingly.
For the investors of ETFs, the lack of liquidity can be a huge concern. ETFs resemble stocks, and if there are no buyers available for the units you would like to sell, things can become difficult for you. However, you won’t need to be heavily concerned about this matter because not all ETFs face this liquidity problem.
ETF vs Index Fund: Availability of the Systematic Investment Plan
As an investor, you can easily opt for SIP in an index fund because it is basically a mutual fund. ETFs do not offer any kind of investment through the systematic investment plan.
ETF vs Index Fund: In terms of the Fund management Process
Index funds are always managed passively because they aim to replicate a particular stock market index. On the other hand, ETFs can be managed both actively and passively.
ETF vs Index Fund: Minimum Investment Amount
When you invest in an index fund, you need to invest a certain amount of money while keeping in mind the minimum investment amount (which can differ according to the nature of the fund). In an index fund, you can directly invest Rs. 5000 to initiate your investment journey with your chosen mutual fund scheme.
Investing in an ETF is different, here you will have to purchase a specific amount of units. For example, if you want to invest in the ICICI Prudential NV20 ETF and the price of each unit is set at Rs. 101, then you will have to pay the multiples of Rs. 101 for every single unit you would want to purchase.
Best ETFs In India
Here is an extensive list of the best ETFs you can invest in India in 2024:
| Name | ETF type | 1Y Returns | 5Y CAGR | Close Price | Market Cap | Expense Ratio |
| Kotak NV 20 ETF | Equity | 8.52 | 15.99 | 102.87 | 0.00 | 0.14 |
| Nippon India ETF NV20 | Equity | 8.76 | 15.95 | 103.75 | 41.64 | 0.32 |
| ICICI Prudential NV20 ETF | Equity | 8.53 | 15.88 | 100.93 | 13.80 | 0.12 |
| ICICI Prudential Sensex ETF | Equity | 7.79 | 12.77 | 651.04 | 53.79 | 0.05 |
| IDBI Gold Exchange Traded Fund | Gold | 8.90 | 12.73 | 5136.70 | 95.22 | 0.35 |
| Kotak Gold ETF | Gold | 8.46 | 12.57 | 48.08 | 1984.14 | 0.55 |
| Aditya BSL Gold ETF | Gold | 8.73 | 12.53 | 50.80 | 353.23 | 0.54 |
| Invesco India Gold Exchange Traded Fund | Gold | 7.52 | 12.53 | 4993.85 | 74.22 | 0.55 |
| HDFC SENSEX ETF | Equity | 7.46 | 12.50 | 642.93 | 128.97 | 0.05 |
| Axis Gold ETF | Gold | 8.51 | 12.43 | 48.05 | 319.17 | 0.53 |
| SBI-ETF Gold | Gold | 8.25 | 12.29 | 49.19 | 2644.09 | 0.64 |
| ICICI Prudential Gold ETF | Gold | 8.48 | 12.25 | 49.25 | 1905.05 | 0.50 |
| LIC MF ETF-Sensex | Equity | 8.01 | 11.57 | 642.03 | 676.62 | 0.10 |
| Aditya BSL Nifty ETF | Equity | 5.34 | 11.55 | 19.52 | 481.93 | 0.05 |
| BHARAT Bond ETF-April 2023-Growth | Debt | 5.00 | Nil | 1220.33 | 8369.70 | 0.00 |
| BHARAT Bond ETF-April 2031-Growth | Debt | 3.69 | Nil | 1106.60 | 0.00 | 0.00 |
| BHARAT Bond ETF-April 2032 | Debt | 3.33 | Nil | 1038.03 | 6496.91 | 0.00 |
| BHARAT Bond ETF-April 2030-Growth | Debt | 3.56 | Nil | 1239.95 | 6636.67 | 0.00 |
| Nippon India ETF Nifty CPSE Bd Plus SDL-2024 Mat | Debt | 2.82 | Nil | 111.24 | 0.00 | 0.20 |
| Nippon India ETF Nifty SDL-2026 Maturity | Debt | 2.96 | Nil | 110.50 | 183.71 | 0.20 |
(Last updated on 2nd March 2023)
Best Index Mutual Funds
Here is the list of top-performing index funds you can invest in 2024:
| Name | NAV | SIP Investment | AUM | CAGR 10Y | Exit Load | Expense Ratio |
| Taurus Ethical Fund | 88.51 | Eligible | 84.24 | 14.83 | 1.00 | 1.18 |
| HDFC Index Fund-S&P BSE Sensex | 544.93 | Eligible | 4141.51 | 13.21 | 0.25 | 0.20 |
| ICICI Pru Nifty Next 50 Index Fund | 34.69 | Eligible | 2450.30 | 13.04 | Nil | 0.30 |
| IDBI Nifty Junior Index Fund | 30.51 | Eligible | 56.15 | 12.93 | Nil | 0.32 |
| IDFC Nifty 50 Index Fund | 37.71 | Eligible | 634.60 | 12.90 | Nil | 0.10 |
| Tata S&P BSE Sensex Index Fund | 154.27 | Eligible | 172.00 | 12.88 | 0.25 | 0.27 |
| ICICI Pru Nifty 50 Index Fund | 178.59 | Eligible | 3927.08 | 12.84 | Nil | 0.17 |
| Nippon India Index Fund-S&P BSE Sensex Plan | 30.96 | Eligible | 360.98 | 12.83 | 0.25 | 0.15 |
| HDFC Index Fund-NIFTY 50 Plan | 163.77 | Eligible | 7399.25 | 12.79 | 0.25 | 0.20 |
| UTI Nifty 50 Index Fund | 118.63 | Eligible | 9337.37 | 12.78 | Nil | 0.20 |
| Taurus Nifty 50 Index Fund | 35.24 | Eligible | 2.33 | 12.66 | 0.50 | 0.44 |
| Nippon India Index Fund-Nifty 50 Plan | 30.84 | Eligible | 635.74 | 12.60 | 0.25 | 0.20 |
| Tata NIFTY 50 Index Fund | 115.09 | Eligible | 347.87 | 12.58 | 0.25 | 0.16 |
| LIC MF S&P BSE Sensex Index Fund | 115.84 | Eligible | 68.86 | 12.56 | 0.25 | 0.38 |
| SBI Nifty Index Fund | 157.82 | Eligible | 3273.72 | 12.43 | 0.20 | 0.18 |
| IDBI Nifty Index Fund | 34.81 | Eligible | 196.15 | 12.42 | Nil | 0.32 |
| Franklin India NSE Nifty 50 Index Fund | 144.50 | Eligible | 489.76 | 12.38 | 0.25 | 0.24 |
| LIC MF Nifty 50 Index Fund | 100.89 | Eligible | 53.83 | 12.28 | 0.25 | 0.20 |
| Aditya Birla SL Nifty 50 Index Fund | 176.16 | Eligible | 508.56 | 12.18 | Nil | 0.32 |
| Sundaram Nifty 100 Equal Weight Fund | 108.13 | Eligible | 54.42 | 10.73 | Nil | 0.46 |
(Last updated on 2nd March 2023)
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ETF Vs Index Fund India- Quick Summary
- The main difference between ETFs and index funds is that index funds replicate any specific stock market index, whereas ETFs take advantage of stock market corrections.
- It is compulsory for you to possess a Demat account if you want to invest in ETFs, whereas investment in index funds can be done by simply completing your mutual fund KYC.
- Index funds are not affected by illiquidity, whereas ETFs are very much reliant upon liquidity, which is why without any kind of liquidity available in the market, ETF investors won’t be able to sell their holdings.
- Index funds allow investors to invest using the SIP method, whereas retail investors won’t be able to enjoy the same facility with ETFs.
ETF Vs Index Fund India- Frequently Asked Questions
1. Which is a better option for an investor Index Fund or ETF?
Choosing between an index fund or ETF will totally depend on your investment style as well as other preferences. For example, if you want to get tax benefits and save on expense ratio, then an ETF will be your first choice because, in comparison to index funds, ETFs tend to have lower expense ratios.
2. Why are ETFs not so popular among Indian investors?
There are multiple reasons why ETFs have not been able to make enough impact on Indian investors. Some of them are mentioned below:
- In terms of variety, ETFs in India are extremely limited therefore, investors do not have many options available to them. Apart from gold and index ETFs, there are not any other reliable commodities available for investment.
- Globally in terms of tax efficiency, ETFs received better margins in comparison to mutual fund schemes, but the same is not applicable in a country like India.
3. Is an ETF a better financial instrument than a mutual fund in India?
If you are looking to diversify your investment portfolio, then both mutual funds and ETFs can be excellent financial instruments. However, you need to keep in mind that mutual funds are extremely popular in India, and ETFs are not.
The investment options for ETFs are limited. On the other hand, there are multiple types of mutual funds schemes available, and according to your risk profile, you can choose to invest in the same.
4. What is the best index ETF in India?
Some of the best index ETFs in India are:
- ICICI Prudential NV20 ETF
- LIC MF ETF-Sensex
- ICICI Prudential Gold ETF
- HDFC SENSEX ETF
5. Which is a safer investment option ETF or an Index Fund?
In terms of investment risk, both index funds and ETFs have similar positions. To understand if it is okay for you to invest in any of these investment options, you need to evaluate the schemes very carefully. The risk factor of these two financial instruments will also depend on the securities or assets owned by the fund.
6. Which is better: Nifty ETF or the Nifty Index Fund?
If you want to take advantage of the index correction in the stock market, then an ETF can be a viable option for you. On the other hand, if you are thinking about taking the SIP approach, then investing in the Nifty index fund would be a better choice because liquidity can be a problem for ETFs.
7. Is an ETF suitable for long-term investment?
For long-term investments, exchange-traded funds can be a great and reliable option. Due to their diversified approach, ETFs are far better than normal stocks and indices. You can also receive excellent returns from your investments. More importantly, it is a passive investment with a low expense ratio, and you will also receive tax benefits from the same.
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