Index Fund vs ETF: Which is Better for Wealth Creation: Choosing the right investment option is an important decision for investors. If you are planning a long term investment for your retirement, then index funds and exchange traded funds (ETFs) are the two main options. Both funds fall under the category of ‘passive’ investment, but there are some important differences between the two, which can affect your investment decision keeping in mind your investment needs. Therefore, it is important for you to know about them before choosing one of the index funds and exchange traded funds.
What is the specialty of an index fund
An index fund is a type of mutual fund that tracks a particular index such as Sensex or Nifty 50. The fund invests in the constituent stocks of any index and is thus called a ‘passive’ investment. Investing in index funds is very easy through SIP (Systematic Investment Plan), which helps you make regular monthly investments.
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Features of Exchange Traded Funds (ETFs)
ETFs also track a particular index, but they trade like stocks in the stock market. A demat and trading account is required to buy ETFs. ETFs are known as low-cost investment products, but they do not have the facility of SIP, so you have to buy manually every time you want to invest.
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Who is better for wealth creation?
The answer to the question of which is better between ETF and index fund in terms of wealth creation depends on the needs of the investors. But to understand this issue, it is important to know the benefits of both the funds.
Advantages of ETFs
– Low cost: The cost of investing in ETFs can be slightly lower than index funds. The expense ratio in these can be up to 5-7 basis points.
– Liquidity: ETFs can be bought and sold on the stock market, allowing you to buy or sell immediately. However, some ETFs may have low trading volumes, which may impact liquidity.
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Benefits of Index Funds
, Advantages of SIP: Index funds are easy to invest in through SIP, which gives you the discipline to invest regularly.
, Better Liquidity: In Index Funds, the fund house accepts your redemption request on any working day, so there is no worry of liquidity.
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Who is better in terms of cost and liquidity
– Cost:ETFs may cost slightly less, but even index funds through direct plans can have an expense ratio of around 10-15 basis points.
, Liquidity:There is no liquidity problem in index funds, whereas liquidity in ETFs depends on the trading volume of the funds.
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Decide based on your needs
The decision of which investment option is better for an investor, between ETF and index fund, can be based on his specific needs and preferences. If you want to invest regularly and want the facility of SIP, then index funds can be a better option for you. On the other hand, if you have a demat and trading account and you want to keep the investment cost very low, then ETF can also be a good option. Ultimately, keeping in mind the advantages and disadvantages of both the options, make the right choice as per your investment needs. Also keep in mind that due to being index based, market risk is associated with both the options. Therefore, make the investment decision keeping in mind your risk profile.
