In this video, we will be talking about the differences between index funds and ETFs.

In this video, we will be talking about the differences between index funds and ETFs.

An index fund is a special category of mutual funds. Its portfolio includes all the companies of a specific market index like Nifty 50.

An ETF, or an Exchange-Traded Fund, is a fund that tracks a specific index.

For example, a Nifty 50 ETF will include stocks, bonds and other type of securities which reflect the performance of the index.

At first glance, these two funds seem very similar, but they are not. To invest in these securities, we should first understand what differentiates them from one another.

First is difference in Purpose

An index fund simply mimics a market index.

The fund manager does not make any decision to beat market returns, they simply invest in the same companies as the index – usually in line with stock weights of that index.

On the other hand, an ETF is constructed and traded in such a way that it highlights the returns of the index itself.

For example, a gold ETF will be investing in only those securities which correctly reflect the current state of gold prices in the economy.

This shows that an ETF is built with the purpose of tracking a specific market index or industry.

Next is difference is their trading process:

An index fund, like every other mutual fund, is not traded on a stock exchange. It has to be purchased from an Asset Management Company.

Its NAV, or net asset value, is decided at the end of every working day, and the fund is traded only on this value.

An ETF is traded on the stock exchange. Just like a company share, its market price changes as per the situation in the stock market.

When you invest in an index fund, your investment will contribute to the Assets Under Management or the AUM of the fund.

However, you can only purchase units of an ETF if someone else in the stock market is selling them.

You do not need a demat account to invest in an index fund. You can directly approach an Asset Management Company’s website and invest in their schemes.

However, since an ETF is a stock market security, you will need a demat account to trade its units.

Lastly, let’s talk about the differences in their expenses.

Even though an index fund has a lower expense ratio than other categories of funds, it has a higher expense ratio in comparison to ETFs.

However, an ETF is subject to various trading expenses and taxes like brokerage, STT or Securities Transaction Tax, etc. because it is traded in the stock market.

Before investing in an index fund or an exchange traded fund, it is extremely important for you as an investor to know the difference between the same.

This will help you weigh the risk and return surrounding each of the investment products and then take any investment decision.

Thank you for watching the video.