At a time when the market is prone to constant fluctuations and a behavior of volatility, it is difficult for fund managers to cash on constant profitability for clients. The demand for fund management charges cannot be justified when the fund is unable to draw on profit. In order to combat such a scenario, it is advisable for investors to invest in passive funds, namely index funds and index exchange traded funds (ETFs) which help reduce the cost and offer returns that are in sync with the indices of the market, as they have securities in the same proportion as their underlying index. In such situations, you as a prudent investor are required to be cautious about your investment decisions. Remember one small act of imprudence can tumble down all your financial dreams by pulling your finances to a negligible level. You may be forced to opt for debts like personal loans , home loans etc to finance your requirements which again can raise the level of financial pressure which you might not be in a situation to take. In order to avert yourself from such situations, make sure that you consult your financial advisor at all times, in order to be aware of the financial happenings and foresee as to what might be lying ahead.
While both index funds and index ETFs mirror their benchmark indices, they are traded in a different fashion. Index ETFs are treated as stocks with a fixed number of units, and they can be sold in the secondary market. Today, ETFs have also branched out in various sectors such as gold and other specific sectors. Before you select any fund, analyze the cost involved in each fund. Index ETFs are proven to be more cost-effective as compared to index funds as no distribution commission, custody cost and account statement fee are involved. The expense ratio of index funds is higher than that of Index ETFs due to the involvement of these charges in it. This variation in charge helps Index ETFs secure more returns than index funds in the long run, thereby making them more profitable.
Investors must also inspect the tracking return of the fund, which is the difference between the returns given by the fund and its benchmark index. Tracking returns are generally found to be higher in index funds than in the case of index ETFs. Also, in order to meet their redemption demands, index funds are required to keep some cash aside. This is not applicable to index ETFs as exchange at the fund level leads to the creation of new units. Both index funds and index ETFs are treated in the same manner for tax treatments, wherein the rules of equity mutual funds are applicable over them. Index ETFs, like index funds, make investments in the stocks of an index, in quite a similar proportion. However, index ETFs are traded in single units in the stock market. Thus, you can take full advantage of intra-term volatility and purchase and sell units on the basis of their real-time net asset value. This is not applicable for index funds as they are purchased and sold in the same manner as actively managed mutual funds. Although fund houses do not offer investors an option of systematic investment plans (SIPs) in ETFs, you can ask your broker to invest a fixed monthly amount for them. In order to access an index ETF, you are required to hold a demat account, which can be considered as its major drawback. Thus, with this analysis, it can be understood that index ETFs definitely score high over index funds as they offer better returns and match their benchmark indices more closely.