Do you want to invest in the stock market but the volatility of stocks frightens you? Then probably index funds and ETFs (exchange-traded funds) can be good options for you. Both follow specific stock indices like Nifty 50 or Sensex and allow investing in the market without much risk. But the question is – which one will be right for you? Let’s understand the 5 major differences between them.
What is an index fund?
An index fund is a type of mutual fund that tracks the performance of a stock market index, replicating the returns of that index by holding a portfolio of securities that matches the index’s composition. Such funds are considered good options for investors who are risk-averse or new to mutual funds.
What are ETFs?
Exchange-traded funds (ETFs) are funds that trade on exchanges, just like stocks. ETF prices change throughout the day as per market demand and supply.
Also read: 5 valid reasons to stop your SIP
How to buy index funds and ETFs?
Index Fund: Like a mutual fund, it is bought directly from the fund house or app. In this, buying and selling is done on the basis of NAV (Net Asset Value).
ETF: It is bought and sold in the stock market like stocks, so you need a Demat account.
Index fund Vs ETFs: Cost of investment (expense)
Index Fund: The expense ratio in this can be a little higher because it is managed by the mutual fund company.
ETF: It is cheaper because there is not much interference from the fund manager and the trading cost is also low.
Index fund or ETF – which one allows an SIP facility?
Index fund: If you want to make small investments through SIP (Systematic Investment Plan), then index funds are right for you.
ETF: There is no SIP option in it, you have to invest a lump sum amount every time.
Liquidity and trading
Index fund: It can be bought and sold only at the end of the day according to the NAV.
ETF: It trades like a stock throughout the day, that is, buy or sell whenever you want.
Tax impact
Index fund: In this, long-term and short-term capital gain tax is levied as per the rules of mutual funds.
ETF: It can help in saving tax, but there can be a tax impact on every trade.
Also read: FD vs Mutual Funds vs Stocks: Which is your better investment option?
Conclusion:
If you want to invest comfortably through SIP, then index funds will be right. On the other hand, if you understand the stock market and want trading flexibility, then ETFs can be a good option. Choose the right option as per your needs and invest smartly!