With time, people have realized the fact that they need to invest money in the market if they want to earn high returns in the future. Nowadays in the market, you can easily get a lot of options in which money can be invested. Among all the options, ETF and index funds seem very similar to each other. But the people who have proper knowledge about the share market know that there is a difference between ETF and index fund.
If you want to invest your money, there is a requirement to understand different concepts so well that it can provide you with better results in long run. Both ETF and index funds are like index mirrors like the Nifty 50 and Sensex. Both ETF and Index funds offer adequate diversification across different types of securities. Here are some points of difference that you need to know about both ETF and Index Fund. Let’s have a look at them.
- Management style: Index funds are passively managed instruments, on the other hand, ETFs are something that can be managed actively or passively. According to trusted reports, it is seen that 20% of ETFs in America are managed actively. This means that the investment team that is researching the companies is making all the tactical decisions to build a great ETF portfolio. It can be clearly stated that all Index funds are passive but not ETFs are passive some can be active as well.
- Trading style: Mostly index funds are something that works as a mutual fund whereas ETFs are something that works closer to how stocks work. Mostly The similar working of the ETF makes it possible for them to be traded off throughout the day. In the case of index funds, they can only be bought or sold at the price published at the end of each trading day. So the trading cycles of both these options are completely different. If you have time to trade in the market throughout the day, you can prefer ETF over Index funds. If not, then you can choose according to your preference.
- Minimum investment amount: Index funds are something that is bought in units. For example, if you want 10 or 20 stocks of a company, you need to buy 1 unit or more units of the company. In case the price of 1 unit of ETP is Rs. 30, you need to invest your amount in multiples of 30. However, in the case of index funds, there are generally bought in the term of an amount. You just need to invest your money in Rs. 3000 or Rs. 10000 in Index funds. For ETF the person needs to buy a single unit that can vary in cost so there is a minimum investment amount. For an index fund, the minimum amount to be invested is at least Rs. 100, you can go in a higher amount as well according to your convenience.
- Expense ratio: According to the comparison of these two options i.e. ETFs and Index funds, both of them have lower expense ratio than any other options available in the market, but if you compare both these options, ETFs tends to be the cheaper option that the index funds in most of the scenarios. There is a couple of expense cost that might be different in both cases, an investor should be aware of this thing so that the final call can be made accordingly.
- The difference in liquidity: Mostly when people invest money in index funds, they just simply add funds to their AUM and then go for the job of buying the securities in line. It is seen that ETFs are something that lacks liquidity. Sometimes, there might be any buyer for the units that you want to immediate sell in the market. but there is no such case with Index funds. If you want to have more trading volumes with liquidity invest in Index funds.
- Tracking error: Exchange Traded funds (ETFs) are more likely to have a lower tracking error than index funds. This is because mostly the index funds hold some cash at all points of time just to honor the redemption requests. If you want to manage your assets very well you can invest in Index funds.
Both ETFs and Index funds are something that are availing the best options to all the investors in the market. it is up to the liking and behaviors of the investor towards the trading market. if you want to make the best decision, you can choose the appropriate tools available online to know which one will yield better results. make your trading decision according to the situation of the market, never just rush with the things, make possible analysis and according to it only work in the best possible way.