In March 2023, the total Assets Under Management (AUM) for Index mutual funds in India stood at an impressive ₹1.67 lakh crore. This statistic reflects the growing popularity of index funds in India. Several investors are now choosing Index Exchange-Traded Funds over index mutual fund schemes. Index ETFs generally offer low expense ratios and more convenient options to trade for every investor.
Here are all the differences between index mutual funds and index ETFs:
- Index ETFs require investors to have a Demat account:
A Demat account is essential for trading ETFs on the stock exchange, as ETF units are bought and sold in the same way as individual stocks. In contrast, index mutual funds do not require investors to maintain a Demat account.
- Index funds are managed by fund managers:
Professional fund managers actively manage index mutual funds with the objective of replicating the performance of a specific market index. Index Exchange-Traded Funds, however, are managed passively and they replicate the performance of a stock market index. Index exchange-traded funds trade on stock exchanges like stocks; and their prices change throughout the trading day.
- Index funds allow SIP (Systematic Investment Plan) investments:
Systematic Investment Plans (SIPs) are a popular method of investing in mutual funds, allowing investors to contribute a fixed amount at regular intervals, typically monthly; an approach that encourages disciplined and regular investing. Index ETFs are not designed for SIP investments, as they are traded on stock exchanges, making it impractical to set up a systematic investment plan.
- Index ETFs have lower expense ratios:
A fund’s expense ratio is the fee that is deducted from the assets of the fund to cover various costs, including management and administrative expenses. Index ETFs generally have lower expense ratios compared to their mutual fund counterparts. The passive management style of ETFs results in reduced costs, as there is less need for active decision-making and research.
- ETFs conduct a continuous valuation of funds:
Index ETFs are traded on stock exchanges, where their prices are updated continuously throughout the trading day. Index mutual funds are valued at the end of the trading day based on the Net Asset Value (NAV) of the underlying assets. Investors in mutual funds receive the NAV price when they buy or sell units, which may not reflect real-time market conditions.
What’s better, Index ETFs or index mutual funds?
Investors should consider their financial goals, risk-taking capacity and mutual fund investment preferences while choosing between investing in Index exchange-traded funds and index funds in India. ETFs generally offer cost-effective investment options, making them attractive for investors seeking to minimize fees and expenses. The ability to buy and sell ETFs throughout the trading day provides flexibility for short-term trading strategies or capitalizing on market opportunities.
If an investor prioritizes lower costs and the flexibility of intraday trading, Index ETFs may be the better choice for them. However, if they prefer regular SIP investments and the expertise of a fund manager, Index mutual funds could be the right fit for them. Investors must carefully assess their financial goals and conduct thorough research before making any investment decisions to ensure they align with their long-term financial objectives.
