Index Funds vs ETFs!!! What to choose??? Starting your investment journey in India can feel very overwhelming. You are facing with many options and financial terms that often confuse rather than clarify.
If you’ve been looking into investment choices, you’ve probably encountered two popular investment options: index funds and ETFs (Exchange-Traded Funds).
Don’t worry, you’re not alone in feeling unsure. The good news is that both index funds and ETFs are great choices for Indian beginners.
You don’t need a finance degree to understand the differences. By the end of this guide by Finolysis, you’ll know what each option offers and which one may suit your investment goals better in the Indian market scenario.
What Are Index Funds and ETFs in the Indian Context?
Before diving into comparisons, let’s look at what these mean in the Indian investment landscape.
What is Index Funds?
Index Funds are mutual funds that track specific market indices, like the Nifty 50 or BSE Sensex. You can think of them as a collection containing all the stocks in that index.
When you invest in a Nifty 50 index fund, you’re essentially purchasing a small piece of all 50 companies in the Nifty 50 index, from Reliance Industries to HDFC Bank to TCS, all in a single piece.
What is ETFs?
ETFs (Exchange-Traded Funds) work similar to Index Funds.They also keep track of market indices like Nifty 50, Nifty Next 50, or industry-specific indices.
The main difference is in how you buy and sell them on Indian stock exchanges like NSE and BSE.
Both options use a passive investment strategy. They don’t try to outperform the market by picking individual stocks. Instead, they aim to match the market’s performance, which has been a successful strategy for many Indian investors in the long term.
The Key Differences: Index Funds vs ETFs, That Matter to Indian Beginners
Trading Flexibility:
This is where a significant difference lies for Indian investors. ETFs trade on stock exchanges such as BSE, NSE, etc like regular stocks.
This means you can buy or sell them throughout the trading day at market prices. Index funds, however, can only be bought or sold at the NAV (Net Asset Value) calculated at the end of the trading day.
For Index Funds, it doesn’t matter if you place your SIP order at 9:15 AM or at 3:30 PM, you’ll receive the same NAV calculated after the market closes.With ETFs, the price changes throughout the trading day, allowing you to buy or sell at any point while the market is open and at any time.
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What this means for you: If you’re a long-term investor planning to invest through SIPs (which most Indian beginners should do), this difference probably won’t affect your investment success. But if you prefer to control the timing of your trades, ETFs are more flexible and best for you.
Minimum Investment Requirements in India: Index Funds vs ETFs
This often decides for many Indian beginners. ETFs usually need a Demat account, and you can start with as little as the price of one unit, which could be ₹50, ₹100, or ₹500, depending on the ETF you choose.
Many index funds let you start SIPs with just ₹100-₹500. Platforms like Groww, Zerodha Kite, and Paytm Money make it easy to invest in index funds with low amounts.
What this means for you: Both options are accessible for Indian investors starting with small amounts.
But ETFs require a Demat account, while you can buy index funds directly from AMCs or through various apps without demat.
Demat Account Requirement
One crucial difference for Indian investors is the need for a Demat account. You must purchase ETFs through a Demat account, just like buying individual stocks.
Index funds can be bought directly from the fund house or through various investment platforms without needing a Demat account.
What this means for you: If you don’t have a Demat account and want to start investing right away, index funds might be more convenient. However, opening a Demat account is easier than ever with platforms like Zerodha, Upstox, and Angel One offering free account opening.
Cost Comparison: Expense Ratios in India of Index Funds vs. ETFs
Both index funds and ETFs are known for their low costs compared to actively managed funds.
Generally, expense ratios for index funds are higher than those for ETFs because mutual funds require more operating costs.
In India, popular Nifty 50 index funds typically charge expense ratios between 0.10% to 0.20%, while Nifty ETFs usually charge around 0.05% to 0.15%. For example:
✅ICICI Prudential Nifty 50 Index Fund: ~0.20%
✅SBI Nifty ETF: ~0.07%
What this means for you: ETFs have a slight cost advantage, but the difference is very small. On a ₹10,000 investment, the difference is about ₹10-15 per year, which is not a significant factor for most beginner investor.
Tax Implications for Indian Investors
Both index funds and ETFs are treated as equity investments for tax purposes in India, as long as they invest at least 65% in equity. This means:
✅Long-term capital gains (holding period > 1 year): 10% tax on gains above ₹1 lakh per year
✅Short-term capital gains: 15% tax
✅No tax on dividends for investors
What this means for you: The tax treatment is similar for both options, so this shouldn’t influence your financial decision.
Popular Indian Index Funds and ETFs : Index Funds vs. ETFs
Top Index Funds in India:
✅UTI Nifty 50 Index Fund
✅SBI Nifty 50 Index Fund
✅ICICI Prudential Nifty 50 Index Fund
✅Motilal Oswal Nifty 50 Index Fund
Top ETFs in India:
✅SBI Nifty ETF
✅ICICI Prudential Nifty ETF
✅Nippon India Nifty ETF
✅UTI Nifty ETF
Real-World Scenarios: Which Should Indian Beginners Choose? Index Funds vs. ETFs
Choose Index Funds If:
✅You’re new to investing and want simplicity: Index funds are ideal for SIP investments. You can set up monthly SIPs of ₹500 or ₹1,000 that invest automatically, building wealth steadily over time with little effort.
✅You don’t have a Demat account: If you want to start investing immediately without the hassle of a Demat account making, Index funds are the best option.
✅You prefer mobile apps: Apps like Zerodha, Groww, Kuvera, and ET Money make investing in index funds incredibly straightforward, often with no any requirement of commission.
✅You’re investing small, regular amounts: If you’re starting with ₹500 monthly SIPs, index funds make this very smooth through automatic investment plans.
Choose ETFs If:
✅You already have a Demat account: If you have a Demat account and know how to place trades, ETFs might suit you better since they come with lower costs.
✅You want maximum flexibility: You may prefer to control when your trades execute, or you may want the options to use advanced trading strategies later.
✅You’re cost-conscious: The slightly lower expense ratios of ETFs can accumulate over time, especially for larger investments.
✅You’re comfortable with stock market operations: If you’re already familiar with buying and selling of stocks, ETFs will feel natural to you.
The SIP Advantage for Indian Investors
One major benefit of index funds for Indian investors is the ease of setting up SIPs. You can start a SIP with as little as ₹500 and take advantage of compounding through consistent, long-term investing.
SIPs in ETFs are possible but need more setup through your broker, and it depends on the broker you have choosen and you may encounter issues with fractional units. Index funds manage this seamlessly, making them ideal for rupee-cost averaging as well.
Understanding Indian Market Indices
Before you choose between index funds and ETFs, understand what you’re investing in:
✅Nifty 50: India’s most popular index, representing the top 50 indian companies by market capitalization. It’s a great starting point for very beginners.
✅Nifty Next 50: The next 50 largest companies after Nifty 50. It provides exposure to mid-cap companies with growth potential.
✅Nifty 500: Broader market exposure covering 500 companies across large, mid, and small-cap segments.
✅BSE Sensex: The oldest index in India, representing 30 large-cap companies listed on BSE.
Consider these practical questions: Index Funds vs. ETFs
✅Do you have a Demat account? If not, index funds are easier to start with. If yes, both options are open to you and it totally depends on you what to choose.
✅How much are you starting with? Both options are accessible with very small amounts, but index funds might be more convenient for SIPs.
✅How comfortable are you with technology? If you prefer simple mobile apps, index funds may be a better fit. If you’re comfortable with trading platforms, ETFs work well for you.
✅What’s your investment approach? If you want to set up SIPs and forget about them, go for index funds. If you want more control with lower costs, consider ETFs.
Getting Started: Your Next Steps
No matter which option you choose, here’s how to proceed:
✅Choose your platform: For index funds, look at Zerodha Coin, Groww, Kuvera, or Paytm Money. For ETFs, you’ll need a Demat account with brokers like Zerodha, Groww, Upstox, or Angel One.
✅Start with Nifty 50: Begin with broad market exposure through Nifty 50 index funds or ETFs.
✅Begin investing regularly: Even ₹500 each month can grow significantly over time through compounding effect.
✅Complete your KYC: Make sure your KYC is done for smooth investing.
The Most Important Lesson for Indian Investors
Remember, the best investment is the one you actually make. Whether you choose index funds or ETFs, the key step is to start as soon as possible.
Both options have helped millions of Indian investors grow their wealth over time, and both can do the same for you.
The Indian stock market has shown impressive resilience and growth over the decades.
The Nifty 50 has delivered approximately 12-15% returns annually in the long term, making it appealing for wealth creation.
Don’t let perfect be the enemy of good. Pick the option that feels right for you and start building your financial future today.
Whether you choose the ease of index funds or the flexibility of ETFs, you’re making a smart choice by opting for passive investing instead of trying to time the market or select individual stocks.
Your journey to financial independence doesn’t start with finding the perfect investment product but it starts with taking that first step which help you to excel in your financial journey.
The power of compounding, combined with India’s long-term growth story, can create wonders for your wealth-building journey in long term perspective.
Start today, stay consistent, and the growth of the Indian market do the work for you.
I hope you like this comprehensive guide, feel free to share who need to read this.
Disclaimer: This guide shares general information about investing in the Indian market and should not replace personalized financial advice. Always consider your financial situation and consult a financial advisor if necessary before making investment decisions. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.
Happy Investing 👍
