Investing in a stock market index is a beneficial method of investing in growing markets. Two popular investment options that you can explore for this are index funds and Exchange -Traded funds (ETFs). Read on to understand the basics of index investing and help you be aware of the key differences between index funds and ETF funds.
What are index funds?
Index funds are mutual funds designed to mirror the performance of a specific index, such as the Nifty 50 or Sensex in the Indian context. The idea is simple- instead of attempting to beat the market, index funds aim to replicate its movements, providing you with a diversified portfolio that mirrors the index’s composition. Index funds tend to have lower expense ratios compared to actively managed funds since they do not require extensive research and trading. They are a passive investment strategy well-suited for long-term investors looking for broad market exposure at a low cost.
What are ETF funds?
Exchange-traded funds share a similar philosophy with index funds but come with their unique characteristics. ETFs are traded on stock exchanges just like individual stocks, while index funds are only available for purchase directly from the fund company. ETFs can be bought and sold any time during market hours, offering more flexibility compared to index funds which trade only once a day after market close.
Differences between ETFs and index funds
Trading structure
Index funds: These are mutual funds that can be bought or sold at the end of the trading day at the NAV price.
ETFs: Traded like stocks on the exchange, ETFs can be bought or sold at market price throughout the trading day. This flexibility appeals to investors like who want real-time control over their trades.
Minimum investment
Index funds: Typically require a minimum investment amount.
ETFs: You can buy as little as one share of an ETF, providing a more accessible entry point for those with limited funds.
Cost structure:
Index funds: Tend to have low expense ratios compared to actively managed funds.
ETFs: May have lower expense ratios, but you also incur brokerage fees with each trade.
Management style:
Index funds: Passive management, tracking a specific index.
ETFs: These can be passively managed like index funds or actively managed by fund managers.
Bottom line
Deciding between index funds and ETFs is about what suits your preferences and financial goals and how hands-on you want to be with your investments. If you prefer simplicity and the ease of not constantly monitoring your investments, choosing index funds to invest in can be ideal. They offer a timeless option for a stress-free, set-it-and-forget-it strategy.
