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Why Index Funds score over ETFs?

Investors have begun gravitating towards index funds and exchange-traded funds (ETFs), which are passive and mimic the underlying benchmark indices. They are generally willing to allocate 5-10% of their equity portfolio to index funds and ETFs, which earlier was not there. ETFs and index funds try to mirror the securities in their underlying indices, such as Nifty50, Nifty Next 50 or Sensex, approximately in the same weightage. ETFs are traded on stock exchanges. The question, now, is how to make the choice between an index funds and index ETF?

Check out the key benefits of passive or index funds over ETFs:

• ETF’s are usually bought and sold on an exchange and thus investors need a demat account while there is no such need for investment in an Index fund.

• Benefit of a Systematic Investment Plans (SIP) is not available in ETFs, while Index funds allow SIPs. Further investors have options to manually make additional investments in ETFs which leaves further room for them to be less disciplined than they would be if they set up automatic investments with SIPs in index funds.

• Index funds allows investors to invest through Direct plan also along with the Regular Plan. ETFs, on the other hand, require investors to pay a broker to execute a trade for them as the trades usually happen through a registered broker of a recognized stock exchange. That usually can make ETFs more expensive than index funds despite their lower expense ratios, especially if an investor wants to invest a small amount every month.

• Index funds allow holders to automatically reinvest dividends paid out by the fund back into more shares, which is usually not the case with ETF.

• ETFs usually are not available at the market rate and the spread is sometimes the problem, which can eat into much more than what the expense ratio of an index will.


An Investor Education & Awareness Initiative

 

Investors should deal only with Registered Mutual Funds, to be verified on SEBI website under Intermediaries/Market Infrastructure Institutions". Refer www.ltfs.com for details on completing one-time KYC (Know Your Customer) process, change of details like address, phone number etc. and change of bank details etc. For complaints redressal, either visit www.ltfs.com or SEBI's website www.scores.gov.in. Investors may refer to the section on ‘Investor Education’ on the website of Mutual Fund for the details on all 'Investor Education and Awareness Initiatives' undertaken by the AMC.

Disclaimer: This information is for general information only and does not have regard to particular needs of any specific person who may receive this information. L&T Investment Management Limited, the asset management company of L&T Mutual Fund or any of its associates; does not guarantee/indicate any returns/and shall not be held liable for any loss, expenses, charges incurred by the recipient. The recipient should consult their legal, tax and financial advisors before investing. Recipient of this information should understand that statements made herein regarding future prospects may not be realized or achieved.

 

Mutual Fund investments are subject to market risks, read all scheme related documents carefully
Source: Internal

CL08712

 

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