5 days ago
Why Indian Investors Are Choosing Index Funds Over ETFs
Index funds and ETFs both try to follow a market index instead of choosing individual stocks.
ETFs may have lower yearly fees, but investors may also pay trading costs when buying or selling them.
Some ETFs are not traded often, which can make them difficult to sell quickly.
Index funds are bought through mutual-fund platforms and are familiar to many Indian investors.
They allow people to invest a fixed amount regularly through a SIP.
Investors can usually start with a small amount and do not need a demat account or brokerage account.
Experts say index funds may work well for long-term investors who want a simple core investment.
ETFs may still be useful for lump-sum investments and some gold or international exposures.
Retail investors’ share of passive mutual-fund assets in index funds rose from 11.5% in March 2021 to 55% in March 2026.
Over the same period, other ETFs’ share fell from 83.8% to 30.1%.
ETFs generally have lower expense ratios, but brokerage, bid-ask spreads, taxes and other trading costs can reduce their advantage.
Thin liquidity can make some ETFs difficult to sell, while tracking difference matters more than expense ratio alone.
Index funds offer SIPs, exact-rupee investing, no demat account requirement and access from ₹500, supporting their popularity among new investors.
- Who
- Indian retail investors, along with mutual-fund advisers and market experts.
- What
- Retail investors are increasingly choosing index funds over ETFs within passive mutual-fund investing.
- Where
- India’s retail mutual-fund and passive-investment market.
- When
- The shift was measured between March 2021 and March 2026.
- Why
- Index funds offer convenient SIPs, exact-rupee investing, broad diversification and simpler access, while some ETFs carry trading costs and liquidity risks despite lower expense ratios.
Case for Index Funds
Case for ETFs
Overall cost
Case for Index Funds
Index funds may be more practical after considering that ETFs can involve brokerage charges, bid-ask spreads, securities transaction tax and other transaction costs.
Case for ETFs
ETFs generally have lower expense ratios, typically 0.04%–0.10%, compared with 0.10%–0.40% for equivalent index funds.
Ease of investing
Case for Index Funds
Index funds support SIPs, exact-rupee investments and access without a demat account, making them convenient for first-time and monthly investors.
Case for ETFs
ETFs trade on exchanges and can be useful for investors making lump-sum purchases, particularly in gold and international-exposure products.
Liquidity and behavior
Case for Index Funds
Index funds avoid the problem of having to sell through a thinly traded exchange market and may reduce the temptation to trade based on live prices.
Case for ETFs
ETFs can be efficient when adequately liquid, but investors must check liquidity and tracking difference because low trading volume can make exiting difficult.
Key facts
- Index-fund share
- Rose from 11.5% of retail passive AUM in March 2021 to 55% in March 2026.
- Other ETF share
- Declined from 83.8% to 30.1% over the same period.
- Typical ETF expense ratio
- About 0.04%–0.10%.
- Typical index-fund expense ratio
- About 0.10%–0.40%.
- Index-fund access
- Investors can start with ₹500, without a demat account or brokerage, according to the cited expert.
- Key ETF risks
- Brokerage charges, bid-ask spreads, securities transaction tax, other trading costs and low liquidity.
- Portfolio role
- Experts describe index funds as potential core holdings, while ETFs may suit lump-sum, gold or international exposure.
Quotes
Harendra Zatakia
Sebi-registered investment adviser and founder of Wealth Aligned Financial Advisory
“A large number of new investors entering the market today are also first-time equity investors. For them, an index fund can be a relatively simple way to get diversified equity exposure and experience equity investing before exploring more complex products,”
livemint.com
“And sometimes, selling ETFs due to poor liquidity can be a pain. There are times when investors have been found waiting to liquidate their ETFs, which becomes a huge disadvantage, especially when you get trapped in an ETF that has very low liquidity,”
livemint.com
Sources
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