ETFS or index funds, which is fit for you? Things to keep in mind

Kolkata: Passive investment is becoming popular fast and ETFs (exchange traded funds) and index funds are both instruments of passive investments. Both track market indices but there are important differences between the two. Analysts point out that despite broad similarities, ETFs and index funds differ in parameters of trading, pricing, flexibility, costs and ease of investing. Many investors get confused between the two and in determining which one is appropriate for whom. Let's have a more close look.

Exchange-traded funds (ETFs) are instruments funds that track a specific index, sector, commodity or asset class. As the name indicates, it is traded on a stock exchange like ordinary shares the price of which can be tracked real time by investors. Anyone can buy or sell them during normal market hours -- 9:15 am to 3:00 pm. Like stocks, the price of ETFs fluctuates during trading.

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Index funds are mutual funds which are designed to mirror the performance of a market index as closely as possible. The choice of the index determines the investment basket of the fund. For example, while a Nifty 50 index fund is a broad-based index fund that will replicate the composition of this index, a defence index fund will mirror the composition of the defence index. These strive to track these indices as accurately as possible. These are supposed to be simpler and more long-term investment options than ETFs. Like any other mutual fund, units of these are bought and sold at the fund's NAV at the end of the trading day.

Every investor has his or her own choice and inclinations. On the whole, analysts indicate that ETFs are more suitable for those who invest in lump sums and monitor the markets daily. The reason: it allows them to deploy more funds when the market crashes. On the other hand, index funds are more suitable for those who invest through the SIP mode.

Too high or too low trading volumes can lead of a misleading pricing of ETFs. An appropriate recent example is that of silver ETFs in December 2025. However, with the help of market makers, liquidity remains stable that allow quick buying and selling in the market. Index funds are priced at the NAV at the end of any day.

Another significant difference is that an investor must have a demat account to invest in ETFs since these are purchased and sold like stocks. But investing in index funds are far more convenient since these don't require a demat account.