Comparison & Difference between Index Funds v/s ETF's

Comparison & Difference between Index Funds v/s ETF's
While index funds and ETF’s look similar, there are multiple differences you need to keep in mind before investing in either of them.

Let me highlight the important ones :

1. NAV (Net Asset Value ): Index Funds can be bought/sold like any other open-ended MF at the day end NAV from the AMC where as ETF’s can be bought like a normal stock during trading hours at the real time NAV/Traded Price or iNAV.

2. Expense Ratio: Theoretically, expense ratio of ETF is less than Index Funds but it does not include the brokerage to be paid while buying/selling the ETF through a broker on the exchange & hence don’t compare expense ratios directly between Index & ETF’s.

3. SIP/SWP/STP's: Index fund allows SIP, SWP, STP & ETF’s don’t.

4. DEMAT Account: Demat is mandatory for ETF’s & optional for Index Funds.

5. Bid-Ask Spread: This is extremely important. It is possible that the traded ETF may not have enough volumes & hence the traded price may be different from the live NAV (iNAV/actual to be NAV) resulting in additional cost.

6. Index Funds Vs ETF's - Retails Investor's Choice: What should retail investors choose between Index & ETF? - Retail should stick to index funds over ETF’s.

7. What to look for in Index funds before investing?
a. Index you want to invest in – Sensex, Nifty, S&P 500, Nifty next 50 etc. – depending on the risk/return expectation & diversification requirement of the portfolio
b. Expense Ratio – Lower the better.
c. Tracking differences and Tracking errors of the funds – Lower the better.


How does the AMC make sure the Traded price is close to iNAV?
a. Creating awareness about the ETF where by having natural secondary market liquidity.
b. AMC’s appoint market makers, whose job is to create liquidity in the ETF by quoting buying/selling prices on the exchange & there by keeping the Traded price close to iNAV.
c. If a large investor wants to buy/sell large quantity (Pre defined, lets say ₹ 50 Lakh worth of investment for an example), then the investor can directly reach the AMC & AMC will buy & sell directly at the iNAV & the investor does not need to go through the exchange.

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