Criteria

Index FundsAhmedabad Stock

Structure

Index funds function like traditional mutual funds, and they aim to offer comparable returns to the index they’re replicating, such as NIFTY 50 or SENSEX 100. The pricing of index funds is calculated based on the NAV (Net Asset Value), calculated at the end of the trading day. All index fund transactions are executed using the calculated NAV.

ETFs, unlike index funds, are traded on the stock exchange throughout the trading day like individual stocks. This allows investors to buy and sell ETF units at any time during the trading day at the current iNAV. The iNAV or Intraday Net Asset Value is the actual worth of an ETF unit during the trading day. Simply put, ETFs offer investors the flexibility of intraday trading, unlike index funds.

Index funds have a slightly higher expense ratio compared to ETFs. However, index funds do not have other associated costs like brokerage fees, trading costs, and bid-ask spread.

ETFs have a lower expense ratio compared to index funds. However, ETF investors should consider other associated costs like trading fees, brokerage, and bid-ask spread when calculating the total expense they’ve to bear.

Tracking Errors

Index funds are subject to more tracking errors due to their structuring, which involves keeping a portion of their investments in debt instruments to meet investor redemption requests.

ETFs are able to follow the index they’re tracking with higher accuracy as these funds do not need to maintain cash reserves at par with index funds. Investors purchase ETFs directly from the stock market, which allows mutual fund houses not to be involved in the process. This helps ETF funds not maintain reserved investments in debt instruments.

Liquidity

Index funds offer liquidity, and mutual fund houses ensure that buy and sell requests are honoured.

ETFs can offer even better liquidity than index funds as they’re traded throughout the trading day. If liquidity is important to you as an investor, don’t invest in low-liquidity ETFs.

DEMAT Account Requirement

Investors do not require a DEMAT account for investing in index funds.

Investors must have a DEMAT account to invest in ETFs.

SIP Investment

Index funds allow investors to invest using SIPsLucknow Investment

ETFs do not allow SIP investments

Best Suited For

Index funds are best suited for risk-averse investors who want to match the market returns of popular indices with minimal investment managementHyderabad Investment. These funds are best suited for long-term investors.