Mutual Fund Investment: Investors are increasingly interested in passive investment instruments like index funds and exchange-traded funds (ETFs) in the country. This trend is increasing because equity market returns are declining due to the continuous selling by foreign institutional investors (FIIs). In such a situation, it is important to know what index funds and ETFs are and what are the differences between them.

Trading mechanism
ETFs are bought and sold like shares in the stock market and can be bought or sold at current market prices during the day. Index funds trade only once a day, when the stock market is closing and hence this trade is based on the net asset value (NAV) at market close.

Flexibility in investment
Investors can take advantage of intraday price variations with the help of ETFs, so they are suitable for investors who are ready to take advantage of price variations. Index funds are not as flexible in this context. They can only be sold or bought at the end of the trading day, which takes away the opportunity to trade in real-time.

Demat account requirement
You need to have a demat account to invest in ETFs. Index funds do not require a demat account, making it a convenient option for investors who do not want to take the route of indirect mutual fund investment. If you do not want to directly participate in the market and do not want to open a demat account, you can consider index funds.

Systematic investment plans
Investors can invest in index funds under systematic investment plans (SIPs), wherein they can invest a small amount periodically. This is not possible for ETFs in most cases.

Expense ratio
ETFs are generally cheaper than index funds as they follow a passive management strategy and hence have minimal operational expenses. This is the main reason why ETFs are a favorite among long-term investors.

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