In modern times, investors can hardly find the time to take care of their investments. They usually find ways to invest into passive investment streams where their money is managed by professional fund managers who invest and trade the investment on the investor’s behalf.
Index funds and ETFs (Exchange Traded Funds) are popular passive investment schemes where the investment is usually handled by professional fund managers. But what is an Index fund and an ETF? And which is the better form of investment?
You can find the answers to these questions in this article. Let’s have a look.
Index funds are like mutual funds where the investment is made in securities and further diversified in shares, bonds, and commodities. However, these index funds mostly try to trade as per the popular indices such as NIFTY 50 or SENSEX 100. Because of this, investors enjoy dual benefits of investing in risky shares with lower risk, as the index fund ensures that the investment does not fall from the benchmark, irrespective of market conditions.
Index funds provide good returns with long-term wealth creation benefits, thus, gaining popularity as a convenient passive investment option for investors.
Some of the characteristics of index funds are as follows:
ETFs or Exchange Traded Funds are funds that mostly trade in the intraday shares market and clock the profits at the end of the day. ETFs are highly transparent in nature, where investors get to know exactly where their investments are allocated. Like with index funds, ETFs are also affected by the share market, and these transactions take place on a real-time basis. Some examples of ETFs are industry ETF, bond ETF, currency ETF, commodity ETF, inverse ETF, etc.
Some of the characteristics of the ETFs are as follows:
Thus there are many similarities and differences in Index funds and ETFs:
Thus, it can be said that ETFs are traded like stocks, while index funds are traded like mutual funds.
Q1. Which is the safer option for investment between an Index fund and Exchange Traded Fund?
ETFs are a good investment for better growth, whereas index funds are a safer form of investment.
Q2. Which is the more widely traded form of investment in the market?
Index funds are a widely traded form of investment compared to ETF funds.
Q3. Which form of investment is more convenient?
Index funds are the more convenient form of reinvestment.
Q4. Which investment form diversifies the investor’s risk?
Index fund diversifies the investor’s risk in comparison to ETFs.
Q5. Can an investor invest in the form of SIP?
An investor can invest in an index fund via SIP, whereas this cannot be done to trade when trading in ETFs.