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But if you are an investor who looks to time the market, then that is where an ETF comes in handy with features like intraday trading, stop losses, order limits, etc. But the purchase of an index fund can be more straightforward. So just as you buy 10 or 20 stocks of a company, you need to buy 1 unit, 7 units, units, etc. So if one unit of an ETF is Rs. Index Funds, on the other hand, are generally bought in terms of an amount. So you invest Rs.
This unit versus amount context has a bearing on the minimum investment one needs to put up when purchasing either of these financial products. Like in ETFs, most trading platforms allow their investors to buy even a single unit. So you can invest Rs. However, when buying some units in an Index Fund, all mutual fund companies require a minimum order value of at least Rs.
Index Fund: Difference In Expense Ratio As compared to actively managed mutual funds, both ETFs and Index Funds have lower expense ratios which means the fee charged by mutual fund companies to manage your money. However, there are two additional costs that ETF investors need to be aware of.
The first of these extra costs are the commissions charged by your broker, i. This commission charged by the broker is typically a percentage of the amount traded or a flat fee per transaction. The second cost when trading in exchange-traded funds is the bid-ask spread, which is a small transaction cost that is embedded in the price of the ETF So these are the couple of costs that you need to consider before you determine the final cost of ETFs and compare it with the expense ratio of Index Funds.
Index Fund: Difference In Liquidity When you invest money in an Index Fund, the mutual fund company simply adds your funds to its AUM and then goes about its job of buying securities in line with the benchmark. And since the exact opposite happens when you wish to redeem in effect with Index Funds, there is no real concern on the liquidity front. However, when it comes to ETFs, the lack of liquidity can undoubtedly be a concern.
So imagine a scenario where you want to sell units of your ETF but say there are no buyers for those units. Nevertheless, the situation in India is certainly improving from a liquidity point of view in some ETFs. But liquidity is a problem, especially in some sectoral or smart beta ETFs where the trading volumes are still on the lower end. This is because Index Funds usually hold some cash at all points to honor redemption requests.
In the case of ETFs, an asset management company has no such obligation. The AMC has no role to play in this. So the liquidity Index Funds provide is the reason for a marginally higher tracking error. Moreover, when money comes in small amounts in Index Funds, then deploying them takes some time.
This also leads to cash holding in Index Funds. So the fund manager of an Index Fund has to deploy all the money received daily in the same proportion as the index. Now, assume the fund manager needs Rs. However, on a given day, the fund received Rs.
So, the fund manager will now need to wait for another Rs. ETFs face no such challenge. When you invest in ETFs, you buy some of the readily available units in the market. So there is no need for the asset management company to hold your cash or wait until it has enough money to buy stocks in the same proportion as the index.
Therefore, the unavailability of the SIP route in ETFs is a serious handicap, as the SIP route remains a very disciplined and steady way for investors to participate in the equity markets. So, if you are one of those investors who are more comfortable investing in equities using the SIP route, then presently, Index Funds might be the right way to go about it.
Index Fund vs. Every time. NerdWallet, Inc. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice.
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Our partners cannot pay us to guarantee favorable reviews of their products or services. Here is a list of our partners. Exchange-traded funds and index funds are great for new investors and experts alike, but there are a few differences to note before you start investing. Chris Davis , Alana Benson Mar 16, Many or all of the products featured here are from our partners who compensate us.
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Wondering whether exchange-traded funds, also known as ETFs, or index funds are a better investment for you?