Difference between ETFs and Index, advantages and disadvantages

ETFs and index funds though similar in terms of the nature of investment actually quite different. The difference between ETFs and Index Funds are listed below:-

1. Both ETFs and index funds invest in a basket of stocks to replicate an index. ETFs are traded on stock exchanges. Index Fund on the other hand is a mutual fund.


2. Unlike a mutual fund, where NAV is calculated at the end of the day, the price of the ETF changes real time throughout the day, based on the actual share prices of the underlying stocks at any point of time during the day


3. You need to have a demat account to invest in an ETF. On the other hand, you do not necessarily need a demat account to invest in an index fund.


4. Fees charged by ETFs is lower than that of Index Funds. ETF expense ratios are around 0.5%, while index fund expense ratios are much higher, though not as high as diversified equity funds.


5. You can invest in Index Funds through Systematic Investment Plan (SIP). You cannot invest in ETF through SIP.

Different research agencies may have different categorizations for ETFs and Index Funds depending on their own categorization methodologies. However, you will be able to understand whether a scheme is an ETF or index fund by carefully reading the scheme information document. For example, Kotak Nifty ETF is an ETF and not an index fund. Examples of index fund are ICICI Prudential Index Fund – Nifty Plan, UTI Nifty Index Fund, Birla Sun Life Index Fund, SBI Magnum Index Fund, Principal Index Fund, Franklin India Index Fund – NSE Nifty Plan, HDFC Index Fund – Nifty Plan etc.