Understanding Exchange Traded Fund & Index Funds

By Advisorymandi
6-April-2018 11:06:40 AM
Exchange Traded Fund & Index Funds

Mutual fund we all know is one investment vehicle that has garnered a load of popularity in just few years. As per the latest report, Assets under management of Mutual fund base grew to over Rs 23 lakh crores i.e., by 26% on YoY basis by adding Rs 4.75 lakh crore in FY2017-18. Rise is buoyed by spirited investor which was stir by increasing awareness among the investor.

Mutual fund is best suited for every class of investor. But emergence of mutual fund has increased retail participation in the stock market. Due to functional characteristic of diversification and being managed by professionals, risk averse investors have shifted from putting their hard earned moolah directly to equity to mutual funds.

There are various types of mutual funds one of them being index fund. Index fund is one passive mutual fund. Passive funds simply copy the footsteps of market. Passive fund managers replicate the index, thus put in their corpus into the stocks which makes the index.

Exchange traded fund popularly known as ETF also tracks the index. ETFs are also a form of mutual funds which are listed and trades like any other shares over the exchanges. These are generally created by institutional investors. Just like index fund, exchange traded funds also replicates the index and tries to generate similar return like the market.

Let’s understand the difference between the two.

Index funds are open ended fund, i.e. an investor can exit the fund any time as per his/her wish. ETF are close ended fund with fix lock in period.

ETF’s unlike index fund are listed on exchange just like any other share of the companies which listed on NSE or BSE or any other regional exchange. Index fund are not listed, their NAV’s are calculated on the basis of the value of the stocks or the assets classes mutual fund manager have invested in.

ETF as is listed on exchange share some characteristics of share. To invest in ETF, one needs to have demat account, whereas for the index fund you can simply buy unit of mutual fund from the fund house directly managing the particular mutual fund.

Looking at the taxation part, both ETF and index funds are treated like usual equity oriented funds. Thus as per the new tax law introduced in the budget 2018-19, now long term gains from equity oriented fund and gains from  share trading exceeding 1,00,000 shall be taxed at 10%, where as short term gains are taxed at 15%.

One must choose to invest in liquid firm or ETF depending on their past returns and performance. However the return will depend on how well diversified your ETF or Index fund is. So before selecting the index or fund you must check the underlying asset of the firm.

The second key to unlock the right option is to check the liquidity. Illiquid funds or ETF will pose a problem while exiting the fund, thus liquidity is very important factor to be taken.

Thus to some extent ETFs and Index funds are certainly same but their difference does make them perform differently and giving different returns.

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Author: Advisorymandi

AdvisoryMandi is India's most trusted Stock Market Advisory marketplace covers NSE, BSE, MCX & NCDEX. Invest with confidence and harness the power of AdvisoryMandi to make smarter investment decisions in Stocks, Indices, Commodities, Forex & IPO.

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1 year 11 months ago

Thanks for differentiating the exchange trading funds and index funds. But, index funds have no liquidity of their own but a higher percentage of assets in cash and liquid securities than exchange-traded.

1 year 9 months ago

Good to be here! Gaining intense knowledge about share market and trading strategies