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What Is an Index Fund and How Is It Different from an ETF?

May 26, 2025

Investing through the stock market is on the rise, especially in India, with new investments being made through online platforms and simplified financial solutions. If you're new to investing, it can be overwhelming with so many options available. Look for two key words that will always pop up - index funds and ETFs. They might sound technical, but they are, in fact, the two easiest ways to invest in the market.

We will explain what an index fund is, what is an ETF, and the main differences behind them in everyday language. No complicated jargon, no confusing charts—only a clear plan for making better choices. If you're looking for the best index funds for long-term growth or trying to figure out the index fund vs ETF issue, this guide's for you.

What Is an Index Fund?

An index fund is a type of mutual fund. It doesn't try to beat the market but instead tries to copy it. Think of it like this: if the stock market is a race, active investors try to run ahead. Index funds, on the other hand, simply aim to keep pace.

So, what is an index fund really doing? It invests in the same stocks that make up a market index like the Nifty 50 or Sensex. If the Nifty 50 goes up by 10%, the index fund also tries to give you a 10% return. It's a "passive" investment - you're not relying on a fund manager to pick stocks for you.

How Index Funds Work

They work by pooling money from many investors and then using that money to buy all (or most) of the stocks in a chosen index. This means you get wide exposure to the market with just one investment. Because the fund is just mimicking the index, the cost of running it is low. That's one reason why people often search for the best index funds to invest in for long-term, low-cost growth.

What Is an ETF?

Now, let's understand what an ETF or an Exchange-Traded Fund is. An ETF also tries to mimic a stock market index, just as an index fund does, but the ETF has an important difference: an ETF is traded on the exchange in a similar fashion as individual company share. This means you are able to buy and sell ETFs at market prices during the trading session. With index funds, your investment is processed based on the closing value of the day which also includes a little bit of paperwork. So, while both aim to follow an index, the way you access them is different.

Index Fund vs ETF – What's the Real Difference?

When comparing an index fund vs an ETF, here are the main things that stand out:

Buying method: Index funds are bought through a mutual fund company. ETFs are bought like stocks on the stock market.
Pricing: ETFs have real-time prices that change during the day. Index funds are priced once a day.
Ease of use: Index funds are simpler for beginners. ETFs may require a demat account and some understanding of how markets work.
Liquidity: ETFs may offer better liquidity (you can exit anytime during market hours), but that depends on trading volume.

For a first-time investor, index funds offer a "set-it-and-forget-it" approach, while ETFs suit someone who's comfortable using trading platforms.

Why Are These Investments Popular in India?

In India, many investors are now embracing index funds and ETFs because they are simple, low-cost and more transparent than actively managed mutual funds. They don't claim miracles, but if held over the long-term, they can help generate robust wealth by keeping pace with the overall market return.

When people talk about the best index funds, they often mean funds that follow reliable, well-established indices and charge low fees. Similarly, there are different types of ETFs available in India today - some track stock indices, others may follow gold prices or specific sectors.

Are Index Funds and ETFs Right for You?

If you're someone who doesn't want to track the market daily or make decisions every month, index funds can be a great choice. You just invest regularly and let your money grow with the market.

If you're more hands-on and like watching the market, then ETFs might appeal to you. You can take advantage of price changes during the day and manage your holdings more actively.

The beauty of both options is that they're built for the long term and require less research compared to individual stocks.

Conclusion

They provide ordinary investors the opportunity to own stocks and not have to know it all or follow it every day. If you want to start investing, Indiabulls Securities Limited offers a safe and straightforward way to invest in index funds and ETFs. With tools designed for the modern investor, it's a great place to begin passive investment.

FAQs

Can I invest in index funds without a demat account?

Yes. Unlike ETFs, index funds don't need a demat account. You can invest directly through mutual fund platforms or distributors.

Do index funds and ETFs give dividends?

Some do. Both index funds and ETFs may offer dividend options, but this depends on the specific scheme. Most investors prefer growth plans where returns are reinvested.

How often do index funds update their stock holdings?

They usually follow the changes in the underlying index. If a stock is added or removed from the index, the fund reflects that change too.

Are ETFs better than index funds for short-term investing?

Not necessarily. Both are designed for long-term wealth building. Short-term movements can be unpredictable and may not suit conservative investors.

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