MollyTaylor
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People often get confused between both. Although
Structure
ETF:
An ETF is made up of stocks making a particular index like Sensenssen or Nifty. Each of the stock would have the same weight as it has on the index. Some portion of its assets may be held in cash or money market securities for liquidity purpose. Returns of an ETF are usually close to that of the index. However, since the percentage of the debt or liquid assets varies with ETF so does it return from different ETFs they think they all track the same index.
Index Funds:
The portfolio of index funds also replicates to the stock exchange index. Since index funds have no liquidity of their own, they usually have a higher percentage of assets in cash and liquid securities than ETFs. Therefore this is for known in industry terminology as 'tracking error'. More top the tracking error, more significant the deviation from current index returns (in any direction).
Transacting
ETF:
ETFs as the name suggests, are bought and sold on the exchange. So you need a demat account for investing in ETF. Minimum one unit of the ETF has been bought and it is done in the same way as shares are purchased through a broker.
Index Funds:
These are mutual funds and units can be bought lump sum or periodically through SIP. Automating investment through SIP is a definite advantage you can get through index funds.
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looks similar but in the real term, they differ in various aspect. ETFs and index funds are merely two different ways of investing in the same portfolio of shares. Let me take you through the structure and transacting method.Structure
ETF:
An ETF is made up of stocks making a particular index like Sensenssen or Nifty. Each of the stock would have the same weight as it has on the index. Some portion of its assets may be held in cash or money market securities for liquidity purpose. Returns of an ETF are usually close to that of the index. However, since the percentage of the debt or liquid assets varies with ETF so does it return from different ETFs they think they all track the same index.
Index Funds:
The portfolio of index funds also replicates to the stock exchange index. Since index funds have no liquidity of their own, they usually have a higher percentage of assets in cash and liquid securities than ETFs. Therefore this is for known in industry terminology as 'tracking error'. More top the tracking error, more significant the deviation from current index returns (in any direction).
Transacting
ETF:
ETFs as the name suggests, are bought and sold on the exchange. So you need a demat account for investing in ETF. Minimum one unit of the ETF has been bought and it is done in the same way as shares are purchased through a broker.
Index Funds:
These are mutual funds and units can be bought lump sum or periodically through SIP. Automating investment through SIP is a definite advantage you can get through index funds.