According to data from iganony the Association of Mutual Funds in India (AMFI), the AUM of index funds reached Rs 1.73 lakh crore in FY 22, reflecting a remarkable 197% growth compared to the FY21 AUM of Rs 58,173 crore.
For investors looking to tap into indices like INDEXNASDAQ: .IXIC, the choice between INDEXNASDAQ: .IXIC ETFs and INDEXNASDAQ: .IXIC index funds becomes crucial.
Understanding the Difference: Indexnasdaq: .ixic Funds vs. ETFs
Index funds and indexnasdaq both fall under the umbrella of passive investment instruments, aiming to replicate the performance of an underlying index. However, the key differentiator lies in how they are bought and sold:
- Index Funds: These are passive mutual funds that can be invested in like any other mutual fund. You don’t need a DEMAT account to invest in index funds.
- ETFs (Exchange-Traded Funds): Similar to index funds in their objective, ETFs are bought and sold on an exchange, much like individual stocks. Investing in ETFs necessitates a DEMAT account.
For investors without a DEMAT account, index funds are the preferred choice, while those with a DEMAT account may explore both options to determine the better fit for their needs.
Using Tracking Error for Performance Comparison
Before comparing INDEXNASDAQ: .IXIC ETFs and INDEXNASDAQ: .IXIC index funds, it’s essential to understand the concept of tracking error. Tracking error measures how effectively a fund replicates the underlying index. A more precise duplication is reflected by a reduced tracking error.
Several factors contribute to tracking error:
- Expense Ratio: The higher the expense ratio, the greater the tracking error. Fund expenses impact the fund’s ability to closely track the index.
- Cash Balance: Maintaining a cash balance for liquidity purposes can lead to differences between the fund’s returns and the index’s returns.
- Buying and Selling Impact: The process of buying and selling stocks can introduce disparities, especially when dealing with illiquid stocks.
Limitations of INDEXNASDAQ: .IXIC ETFs
Before making a decision, it’s crucial to understand the limitations associated with INDEXNASDAQ: .IXIC ETFs:
- Transaction Costs: indexnasdaq incur transaction charges, GST on transaction charges, SEBI charges, and stamp duty, impacting overall returns.
- End-of-Day NAV Discrepancy: The Net Asset Value (NAV) of the indexnasdaq at the end of the day can differ from the price at which an investor initially invested, affecting the overall return calculation.
Illustrative Example
Consider an active investor who bought 1,000 units of Nippon India ETF INDEXNASDAQ: .IXIC BeES on July 17, 2022, at Rs 167 each, and sold them on December 1, 2022, at Rs 205 per unit. While the return excluding transaction costs was 22.75%, considering brokerage and other costs, the net return reduced to 22.47%. This illustrates how transaction costs impact returns in ETFs.
Additionally, the end-of-day NAV of the indexnasdaq can be different from the initial investment price, further influencing returns.
Choosing Between INDEXNASDAQ: .IXIC ETF and INDEXNASDAQ: .IXIC Index Fund
The decision between INDEXNASDAQ: .IXIC ETF and INDEXNASDAQ: .IXIC index fund depends on your investor personality and preferences:
- Active Investors: If you aim to capitalize on market corrections during trading hours, indexnasdaq may be suitable. However, transaction costs should be factored in.
- Passive Investors: For those following a systematic investment plan (SIP) and favoring a hassle-free approach, index funds may be more convenient. Additionally, liquidity concerns may be mitigated with index funds.
Conclusion
In the realm of INDEXNASDAQ: .IXIC investing, the choice between indexnasdaq and index funds boils down to your investment approach, liquidity preferences, and the level of active involvement you seek. Understanding the nuances of each instrument, considering transaction costs, and aligning your choice with your financial goals will help you make an informed decision. Whether you opt for the flexibility of ETFs or the simplicity of index funds, the key is to choose an investment vehicle that aligns with your individual financial strategy.
