Mutual funds investments are safer for amateur investors, but you have to choose from a range of options while investing in such schemes. Some of these options may be similar to each other in certain aspects, which can lead to confusion. Index funds and ETF are two of the most common types of mutual funds, where the distinctions can be unclear. Therefore, here is a look at the difference between the two.
Definition of ETF and index funds
Before understanding the intricacies between the two, you need to understand what is ETF and what is an index fund.
An ETF or exchange-traded fund is an investment scheme where the money is invested in stock exchange assets, which include bonds, securities, and stocks. Here, the fund tracks a specific index and the investment portfolio mimics the composition of the index. ETFs are a great investment source if you are looking for tax-efficient and low-cost options.
Now that you know what an ETF is, you should understand what is an index fund. An index fund refers to a mutual fund or ETF, which is designed to follow a specific industry or index in the market.
ETF vs. Index funds
- The base
When you invest in ETF, you should know that it would be traded like other stocks in the market, rather than other mutual funds.
On the other hand, an index fund is similar to all other mutual funds investment and is not traded directly in the stock exchange.
- Pricing
Since ETFs are investments in the stock exchange, the price of each share depends on the demand and supply of that particular stock in the market. Therefore, there is a greater chance of volatility of the market in case of exchange-traded funds.
However, for index funds, the stock market does not determine the price of its units. Instead, it is subject to the changes in the Net Asset Value.
- Cost of trading
ETF investments will cost you for every transaction in the stock exchange, which will drive up the overall cost of investment.
Index funds do not have any transaction charges. You are free to invest as much you want without incurring any additional charges.
- Initial investment
For exchange-traded funds, there is no set minimum or maximum value of the investment. Investors are free to invest as much or as little as they want.
For an index fund, you may need to invest up to a few thousand Rupees. Alternatively, you may need to become a regular investor through SIP investment.
Keep these pointers in mind while determining which of these funds match your investment profile better.
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