Index Fund vs ETF: Investors are cautious about investing money in the capital market due to the Corona virus. Investors are increasingly focused on options that provide safe returns, even if there is less profit than equities. In such a situation, the attention of many investors has also gone to passive funds, where like the index, one can get better and safer returns. Passive investment is the most basic way of investing your money in mutual funds and the purpose of this style is to get returns like an index. There are two common ways to invest in the equity market passively. One is either an index fund or another is an index exchange traded fund (ETF).
What are index funds?
Index funds are also known as index tide or index tracked mutual funds. Such funds invest in the shares of companies involved in any index of the stock market such as Nifty 50 or Sensex 30. As much as the weightage of all the companies in the index, their shares are bought in the same ratio in the scheme. This means that the performance of such funds is similar to that of the index. Index funds are better for investors who want to run risk calculates, even if they get decent returns. That is, the risk of sinking money in the index fund is very low.
Spending costs are low as well as these benefits
- Index funds are managed passively, so index funds cost less than actively managed funds. Their total expense ratio is very low.
- Another advantage of an index fund is that it gives investors the opportunity to diversify their portfolio. It also reduces the risk of sinking money. If there is a weakness in the stock of one company, then the loss is balanced due to growth in the other.
- Tracking error in index funds is less. This increases the accuracy of image indexing. In this way, returns can be estimated more accurately.
Exchange Traded Fund ETF
An exchange traded fund, ie ETF, gives an opportunity to invest in the index. Those who want to invest in shares but do not want to take risk, they can choose this option. All the stocks in the fund manager index take stock in the same proportion and make ETFs. ETFs or exchange traded funds invest in a set of shares. These usually track a particular index. ETFs can only be bought or sold from the stock exchange, the way you buy shares. Investors who are Conservative and do not want to risk the market, should invest in ETFs.
Why there are better options
- The ETF is a replica of the index itself. That is to say, as fast as the index rises, they too can get the same benefit of growth.
- These indices also become increasingly strong when there is a rally in both the Sensex or the Nifty, which benefit ETF investors.
- A major advantage is that the expense ratio of most index-based ETFs is also low. That is, it is cheaper to invest in them.
- ETF diversifies the risk. MF has a risk diversification but has a higher classification.
- If you do not want more volatility in the portfolio, then ETF is a better option. Tax liability in ETFs is like investing in common shares.
(Disclaimer: We have given information only about ETFs and index funds here. This is not an investment advice. Be sure to consult experts at your level before investing.)