We will see ETF vs Index Fund differences are, Exchange Traded Funds (ETFs) and Index Funds both are passively managed investment options that track an underlying index and diversified to invest in stock market allowing them to long investment goals. However, they differ in how they are bought or sold, their price, and their tax benefits.
What is ETF?
An ETF (Exchange-Traded Fund) is an investment fund that holds a collection of assets such as stocks, bonds, or commodities and trades on stock exchanges like a regular stock. ETFs are designed to track the performance of an index, sector, or asset class.
An Exchange Traded Fund based in India, which allows investors to gain exposure to a basket of Indian securities listed on the stock exchange, essentially providing diversified access to the Indian economy through a single investment, tracking a specific index like the Nifty 50 or a sector-focused index; essentially mirroring the performance of that index by holding the underlying stocks in proportion to their weight in the index.
How ETF works?
- An ETF provider chooses assets to include in the fund, such as stocks, bonds, commodities, or currencies.
- The provider sells shares in the fund to investors.
- Investors buy shares of the fund using a brokerage account.
- Investors trade the ETF shares on an exchange throughout the day.
Types of ETFs
1. Equity ETFs (Stock Market ETFs)
Equity Exchange Traded Funds (ETFs) are simple investment products that combine the flexibility of stock investment and the simplicity of equity mutual funds. ETFs trade on the cash market of the National Stock Exchange, like any other company stock, and can be bought and sold continuously at market prices.
Example:
- Nifty 50 ETFs – SBI Nifty 50 ETF, UTI Nifty 50 ETF, ICICI Prudential Nifty 50 ETF
- Sensex ETFs – Nippon India ETF Sensex, HDFC Sensex ETF
- Sector ETFs – ICICI Prudential IT ETF (Tech), Nippon India Bank ETF (Banking)
Best For: Long-term investors who want stock market exposure with diversification.
2. Debt ETFs (Bond ETFs)
Debt Exchange Traded Funds (ETFs) are simple investment products that allow the investors to take an exposure to the fixed income securities. These debt ETFs combine the benefits of debt investments with the flexibility of stock investment and the simplicity of mutual funds. Invest in government bonds, corporate bonds, and other debt instruments.
Example:
- Bharat Bond ETFs – Bharat Bond ETF 2023, 2030, 2032 (Government-backed bonds)
- Gilt ETFs – SBI ETF 10-Year Gilt
Best For: Conservative investors looking for lower-risk, fixed-income investments.
3. Gold ETFs
A gold exchange-traded fund (ETF) is a type of investment that tracks the price of gold and can be bought and sold on stock exchanges. Track the price of physical gold without holding actual gold.
Examples:
- Nippon India Gold ETF
- SBI Gold ETF
- HDFC Gold ETF
Best For: Investors looking to hedge against inflation and diversify their portfolio.
4. International ETFs
A global stocks basket invests specifically in international companies, and helps Indian investors get exposure to international capital markets. The focus may be global, regional or a specific country, and may hold equities or fixed income securities. Provide exposure to global markets like the U.S. and China.
Examples:
- Motilal Oswal NASDAQ 100 ETF – Tracks the Nasdaq 100 (Apple, Amazon, Google, etc.)
- Mirae Asset NYSE FANG+ ETF – Tracks tech giants like Meta, Netflix, Tesla
- Kotak NASDAQ 100 ETF – Another Nasdaq-tracking option
Best For: Investors looking to diversify globally and invest in international companies.
5. Thematic & Sector ETFs
Thematic ETFs and sector ETFs are both types of exchange-traded funds (ETFs) that invest in specific market areas. Thematic ETFs invest in companies that are involved in a specific theme or trend, while sector ETFs invest in companies within a single sector. Invest in specific themes like banking, technology, or ESG (Environmental, Social, and Governance).
Examples:
- Nippon India ETF Nifty PSU Bank – Focuses on public sector banks.
- ICICI Prudential IT ETF – Invests in Indian IT companies.
- SBI ETF Consumption – Tracks consumer sector stocks.
Best For: Those interested in specific industries or megatrends.
6. Smart Beta ETFs
Smart beta ETF uses a rules-based, systematic approach to choose stocks from a particular index. This investment is mix of active and passive investing, focusing on specific strategies like dividend-paying stocks or low volatility stocks.
- ICICI Prudential Nifty Low Vol 30 ETF – Focuses on low-volatility stocks.
- Nippon India ETF NV20 – Tracks top 20 value stocks from the Nifty 50.
Best For: Investors looking for an enhanced return strategy compared to standard index funds.
Which ETF Should You Choose?
- For long-term equity growth → Nifty 50/Sensex ETFs
- For safety & stable returns → Debt ETFs (Bharat Bond, Gilt ETFs)
- For global exposure → NASDAQ 100 ETF, NYSE FANG+ ETF
- For inflation hedge → Gold ETFs
- For sector-specific investing → Banking, IT, or Consumption ETFs
To know more what is equity fund.
Who Should Invest in ETF?
- Beginners & Passive Investors who
- are low-cost, diversified investing,
- prefer a “buy-and-hold” strategy.
- do not want to actively pick and manage stocks.
- Stock Market Traders & Active Investors who
- want flexibility to trade during market hours.
- prefer ETFs over mutual funds for intraday trading or short-term investments.
- use stop-loss orders, margin trading, or options.
- Long-Term Investors who
- looking for steady growth over 5–10+ years.
- want tax-efficient investing with low capital gains taxes.
- prefer ETFs over mutual funds due to lower expense ratios.
- Investors Seeking Global Diversification who want to invest in U.S. stocks & global markets.
- Conservative Investors & Retirees who
- want low-risk, stable returns and Prefer fixed-income ETFs over volatile stocks.
- prefer fixed-income ETFs over volatile stocks.
- Seek passive income through dividends or bonds.
What is Index Fund?
An Index Fund is a type of mutual fund that passively tracks a specific stock market index (like Nifty 50 or Sensex) instead of actively picking stocks. These funds aim to replicate the performance of the index they follow by investing in the same stocks in the same proportion.
How does Index Fund Works?
An Index Fund is a passive mutual fund that aims to replicate the performance of a specific stock market index (like Nifty 50 or Sensex). Instead of actively picking stocks, it automatically invests in all the stocks of the index in the same proportion.
Step-by-Step Working of an Index Fund:
- Index Selection – The fund manager picks an index to track (e.g., Nifty 50, Sensex, Nifty Next 50).
- Stock Allocation – The fund buys the same stocks in the same proportion as in the selected index.
- Example: If Reliance makes up 10% of the Nifty 50, then 10% of the fund’s money is invested in Reliance.
- Automatic Adjustments – When an index adds or removes stocks, the fund automatically updates its holdings to match.
- Passive Growth – As the index grows over time, the fund value also grows. Investors earn returns similar to the index performance.
- Dividends & Reinvestment – If the companies in the index pay dividends, the fund may reinvest them or distribute them to investors.
Types of Index Funds
1. Large-Cap Index Funds
Large cap index funds are a type of mutual fund that invest in the stocks of the largest companies in India. They can be a good option for long-term wealth creation. Invests in India’s largest companies, offering stability and consistent growth.
Examples:
- Nifty 50 Index Funds (Tracks top 50 companies in NSE)
- UTI Nifty 50 Index Fund
- HDFC Nifty 50 Index Fund
- ICICI Prudential Nifty 50 Index Fund
- Sensex Index Funds (Tracks top 30 companies in BSE)
- Nippon India Index Sensex Fund
- HDFC Index Fund Sensex Plan
Best for: Low-risk, long-term investment with steady returns.
2. Mid-Cap & Next 50 Index Funds (High-Growth Potential)
Mid-cap and Next 50 index funds are mutual funds that track the performance of mid-cap and Next 50 indices. They are a type of passively-managed fund that aims to replicate the performance of the index. Invests in emerging large-cap and mid-cap companies with high growth potential.
Examples:
- Nifty Next 50 Index Funds (Top 51–100 NSE stocks)
- ICICI Prudential Nifty Next 50 Index Fund
- UTI Nifty Next 50 Index Fund
- Nifty Midcap 150 Index Funds (Tracks 150 mid-cap stocks)
- Motilal Oswal Nifty Midcap 150 Index Fund
Best for: Investors willing to take moderate risk for higher potential returns.
3. Broad Market Index Funds (Diversified Across All Sectors):
A broad market index fund is a type of mutual fund that mimics the performance of a large stock market index. These funds are a good option for long-term investors. Invests in a larger pool of stocks, reducing risk through diversification.
Examples:
- Nifty 100 Index Fund (Top 100 companies in NSE) – SBI Nifty 100 Index Fund
- Nifty 500 Index Fund (Top 500 companies across large, mid, and small caps) – Motilal Oswal Nifty 500 Index Fund
Best for: Investors looking for broad market exposure.
4. International Index Funds (Investing in Global Markets)
With global index funds, investors can diversify their fund portfolio even after these funds pool their money and invest in stocks or assets from various countries around the world, mirroring the performance of global market indices. Provides exposure to global markets like the U.S. and China.
Examples:
- U.S. Index Funds
- Motilal Oswal S&P 500 Index Fund (Tracks U.S. S&P 500)
- Navi NASDAQ 100 Index Fund (Tracks tech giants like Apple, Google, Tesla)
- Tech-Focused Global Index Funds
- Mirae Asset NYSE FANG+ Index Fund (Tracks Facebook, Amazon, Netflix, Google, etc.)
Best for: Investors seeking global diversification in the U.S. or tech sectors.
5. Thematic & Sector Index Funds (Industry-Specific Investing)
Thematic and sectoral funds are equity funds that invest in stocks based on a specific theme or sector. Invests in specific sectors like banking, IT, or ESG (Environmental, Social, Governance).
Examples:
- Banking Index Funds
- Nippon India ETF Nifty PSU Bank
- IT Index Funds
- ICICI Prudential IT Index Fund
Best for: Investors betting on the long-term growth of specific industries.
6. Smart Beta Index Funds (Alternative Indexing Strategies)
These funds are designed to provide an alternative to traditional market-cap weighted index funds by using a rules-based approach to selecting and weighting stocks. Unlike traditional passive index funds, smart beta funds aim to outperform the market by focusing on specific factors such as value, momentum, and quality. Uses strategies beyond traditional market-cap-weighted indices.
Examples:
- Nifty Low Volatility 30 Index Fund (Focuses on stocks with lower volatility)
- Nippon India ETF NV20 (Tracks the 20 most valuable stocks in Nifty 50)
Best for: Investors who want passive investing with enhanced strategies.
Example: How Nifty 50 Index Fund Works
Let’s say you invest in the UTI Nifty 50 Index Fund:
- The fund automatically invests in the top 50 companies listed in the Nifty 50.
- If Nifty 50 goes up 10%, your investment also grows around 10% (minus expense ratio).
- No fund manager actively trades stocks—it just follows the index!
To know more about Mutual fund returns use Fincal Mutual Fund Online.
Which Index Fund Should You Choose?
| Investment Goal | Best Index Fund Type |
|---|---|
| Low-Risk, Long-Term Growth | Nifty 50 / Sensex Index Funds |
| High-Growth Potential | Nifty Next 50 / Midcap 150 Index Funds |
| Diversified Market Exposure | Nifty 100 / Nifty 500 Index Funds |
| Global Diversification | U.S. S&P 500 / NASDAQ 100 Index Funds |
| Sector-Specific Investing | Banking, IT, or ESG Index Funds |
Who Should Invest in Index Funds?
- Beginners who want passive investing with low risk
- Long-term investors looking for steady growth
- Those who don’t want to actively manage their investments
- People seeking lower-cost alternatives to actively managed mutual funds
Key Differences between ETF vs Index Fund
Both ETFs (Exchange-Traded Funds) and Index Funds track a specific market index, providing low-cost, diversified investing. However, they differ in how they trade, their tax efficiency, and other factors.
| Feature | ETF (Exchange-Traded Fund) | Index Fund |
|---|---|---|
| Trading | Trades like a stock throughout the day | Trades only at end-of-day at NAV of Indian Stock Market |
| Liquidity | Higher (can be bought/sold anytime in trading day) | Lower (bought and sold at the end of trading day at NAV) |
| Minimum Investment | Lower (can buy 1 ETF share as low as ₹50–₹100) | Little Higher (Often ₹500–₹5,000) |
| Expense Ratios | Lower (0.05%–0.2%) | Slightly higher (0.1%–0.5%) |
| Tax Efficiency | More tax-efficient (fewer capital gains distributions) | May trigger capital gains tax due to fund manager redemptions |
| Flexibility | Allows stop-loss orders, margin trading, and options | Simple, no active trading required |
Benefits & Risks
Both ETFs (Exchange-Traded Funds) and Index Funds are popular in market for passive investment vehicles that track a specific market index. However, they have distinct benefits and risks.
Benefits of ETFs (Exchange-Traded Funds):
- Intraday Trading – Can be bought and sold throughout the trading day like stocks.
- Lower Minimum Investment – You can buy a single share, unlike some index funds that require a minimum investment.
- Tax Efficiency – ETFs generally have fewer taxable events than mutual funds due to their unique structure.
- Flexibility – Offers more trading strategies, such as stop-loss orders and margin trading.
Risks of ETFs:
- Trading Costs – Some ETFs may have brokerage fees, especially if frequently traded.
- Price Fluctuations – Since ETFs trade throughout the day, their price may slightly deviate from the net asset value (NAV).
- Liquidity Risk – Some ETFs may have lower trading volume, leading to wider bid-ask spreads.
Benefits of Index Funds
- Low Cost – Lower expense ratio than actively managed funds.
- Diversification – Reduces risk by investing in multiple stocks.
- No Stock Picking – No need to analyze individual companies.
- Steady Long-Term Growth – Historically, markets grow over time.
- Tax Efficient – Fewer trades = lower capital gains tax.
Risks of Index Funds
- No Flexibility – Cannot outperform the index.
- Market Dependent – Falls if the index falls.
- Tracking Error – Returns may slightly differ due to fund expenses.
How to invest in an ETF?
- Open a brokerage account.
- Research and choose an ETF.
- Deposit funds into your brokerage account.
How to Invest in an Index Fund
- Choose an Index Fund: Select a fund that tracks an index like Nifty 50, Sensex, Nifty Next 50, or NASDAQ 100.
- Choose Between Lump Sum or SIP Investment:
- Lump Sum – Invest a one-time large amount. Best for long-term wealth creation.
- SIP (Systematic Investment Plan) – Invest a fixed amount monthly (as low as ₹500). Best for beginners.
- Open an Investment Account:
- To invest in an index fund, you need an account with:
- Mutual Fund Platforms:
- AMC Websites – Invest directly via UTI, ICICI, HDFC, etc.
- Third-Party Apps – Groww, Zerodha Coin, Kuvera, Paytm Money.
- Demat Account (For ETF Index Funds Only):
- If you prefer ETFs over mutual funds, open an account with Zerodha, Upstox, or Angel One.
- Complete KYC (If Not Done Already)
- To start investing, complete KYC (Know Your Customer) with:
- PAN Card
- Aadhaar Card
- Bank Account Details
- Signature & Photograph
- Note: KYC can be done online (e-KYC) through mutual fund platforms.
- To start investing, complete KYC (Know Your Customer) with:
- Invest & Track Your Portfolio
- Select the index fund and investment amount.
- Confirm payment via UPI, net banking, or auto-debit.
- Track fund performance through the AMC website or investment app