Thread by @KirtanShahCFP

Index Funds v/s ETFs

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(Thread)

(1) While index funds and ETF’s look similar, there are multiple differences you need to keep in mind before investing in either of them. Let me highlight the important ones (1/n)

(a) NAV – Index funds can be bought/sold like any other open-ended MF at the day end NAV from the AMC where as ETF’s can be bought like a normal stock during trading hours at the real time NAV/Traded Price or iNAV (2/n)

(b) Expense Ratio – Theoretically, expense ratio of ETF is less than Index funds but it does not include the brokerage to be paid while buying/selling the ETF through a broker on the exchange and hence don’t compare expense ratios directly between Index and ETF’s. (3/n)

(c) Index fund allows SIP, SWP, STP and ETF’s don’t

(d) Demat is mandatory for ETF’s and optional for Index Funds (4/n)

(e) Bid-Ask Spread – This is extremely important. It is possible that the traded ETF may not have enough volumes and hence the traded price may be different from the live NAV (iNAV/actual to be NAV) resulting in additional cost. (5/n)

(f) Traded Price ≠ iNAV - This is Nifty50 ETF compared to Nifty 50 index, ETF was expensive/premium by more than 2% in the first half of the trading & some innocent investors bought the ETF at ~ 12410 levels at a time when index was at around 9600 levels. Source - Zerodha

(2) How does the AMC make sure the Traded price is close to iNAV?

(a) Creating awareness about the ETF where by having natural secondary market liquidity. (7/n)

(b) AMC’s appoint market makers; whose job is to create liquidity in the ETF by quoting buying/selling prices on the exchange and there by keeping the Traded price close to iNAV (8/n)

(c) If a large investor wants 2 buy/sell large quantity (Pre defined, lets say 50Lakh worth of investment for an example), then the investor can directly reach the AMC and AMC will buy and sell directly at the iNAV and the investor does not need to go through the exchange (9/n)

(3) What should retail investors choose between Index & ETF?

Retail should stick to index funds over ETF’s. (10/n)

(4) What to look for in Index funds before investing?

(a) Index you want to invest in – Sensex, Nifty, S&P 500, Nifty next 50 etc. – depending on the risk/return expectation and diversification requirement of the portfolio (11/12)

(b) Expense Ratio – Lower the better
(c) Tracking differences and Tracking errors of the funds – Lower the better (12/12)(END)

For our detailed analytical article on the same by @stepbystep888 , heres the link - fpa.edu.in/blog/index-fun…