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Why Index Funds score over ETFs?

ETFs and index funds try to mirror the securities in their underlying indices
07 November 2022
    Blog

    Investors have begun gravitating towards index funds and exchange-traded funds (ETFs), which are passive and mimic the underlying benchmark indices. They are generally willing to allocate 5-10% of their equity portfolio to index funds and ETFs, which earlier was not there. ETFs and index funds try to mirror the securities in their underlying indices, such as Nifty50, Nifty Next 50 or Sensex, approximately in the same weightage. ETFs are traded on stock exchanges. The question, now, is how to make the choice between an index funds and index ETF?

    Check out the key benefits of passive or index funds over ETFs:

    • ETF’s are usually bought and sold on an exchange and thus investors need a demat account while there is no such need for investment in an Index fund
    • Benefit of a Systematic Investment Plans (SIP) is not available in ETFs, while Index funds allow SIPs. Further investors have options to manually make additional investments in ETFs which leaves further room for them to be less disciplined than they would be if they set up automatic investments with SIPs in index funds
    • Index funds allows investors to invest through Direct plan also along with the Regular Plan. ETFs, on the other hand, require investors to pay a broker to execute a trade for them as the trades usually happen through a registered broker of a recognized stock exchange. That usually can make ETFs more expensive than index funds despite their lower expense ratios, especially if an investor wants to invest a small amount every month
    • Index funds allow holders to automatically reinvest dividends paid out by the fund back into more shares, which is usually not the case with ETF
    • ETFs usually are not available at the market rate and the spread is sometimes the problem, which can eat into much more than what the expense ratio of an index will

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