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What are Index Funds & ETFs in India?

Index Funds in India

An index fund in India is a passive investment scheme that tracks a particular index such as NSE Nifty, BSE Sensex, Nifty 50, Nifty 100 etc. The fund's securities are invested in the same stocks as the index it tracks and may potentially offer similar returns. There are several types of index funds in India:

• Equity Index Funds:

  These index funds track equity market indices. They may be a diverse investment option for investors seeking investments in stocks.

• Sector Index Funds:

  This type of index mutual fund tracks the stocks of companies involved in a particular sector such as technology or healthcare. Investors may invest in a diverse range of stocks within a particular sector and potentially benefit from the performance of the sector.

• Commodity Index Funds:

  These index funds in India track indices related to commodities such as gold or oil. Investments in commodity index funds may be an opportunity to diversify an investor’s portfolio through different asset classes.

• Bond Index Funds:

  These index mutual funds reflect the performance of specific bond market indices. They may be relatively low-risk index investments.

• International Index Funds:

  These index funds track foreign market indices and expose investors to a wide range of markets. Investors may potentially avail the benefits of a geographically diversified portfolio.

• Target Maturity Index Funds:

  These index funds aim to potentially generate income over the target maturity period by tracking a particular index.

Index funds in India are subject to Short-Term Capital Gains Tax and Long-Term Capital Gains Tax. Units held for less than 12 months are subject to STCG tax at 15%. Units held for longer than 12 months are subject to LTCG tax at 10%. Gains up to 1 lakh are exempt from any taxation.

Exchange-Traded Funds (ETFs)

ETFs are passive investment schemes that track a particular index. ETFs are traded on the stock exchange. There are several types of Exchange-Traded Funds (ETFs) in India:

• Equity ETFs:

  These exchange-traded funds are designed to track a specific index. For example, Nifty 50 ETFs track the Nifty 50 Index. This investment can be traded on the stock exchange.

 
• Commodity ETFs:

  Commodity ETFs invest in commodities such as gold and silver. The movement in prices of these commodities may change throughout the day.

Equity exchange-traded funds are subject to STCG and LTCG tax based on the holding period of the stocks. Units held for less than one year are subject to STCG tax at 15%. Units above ₹1 lakh, held for longer than 1 year are subject to LTCG at 10%.

Commodity ETFs are subject to STCG on the sale of stocks in less than 3 years. Capital gains are added to the investor's income tax and taxed according to their income tax slab. LTCG tax is levied on units held for longer than 3 years at 10% with indexation benefits.

Who Should Invest in Index Mutual Funds & ETFs in India?

Index Funds

Index funds may be subject to different levels of market risk. Certain index funds such as target maturity index funds may comparatively be a lower-risk fund. These funds may be suitable for investors with a low-risk appetite. Moreover, investors with a specified investment horizon may potentially benefit by investing in target maturity index mutual funds.

Certain index fund investments such as equity index funds, small-cap index funds and sector index funds may be high-risk investments. These funds are vulnerable to market volatility and fluctuations. Investors seeking a passive investment strategy with a high-risk appetite may potentially benefit by investing in these funds.

Investors must always consider their risk appetite and investment horizon before investing in any scheme. It is important to read all scheme-related information carefully.

Exchange-Traded Funds (ETFs)

ETFs may be a relatively low-cost investment option to obtain exposure to the stock market. Investors seeking exposure to the stock market may potentially benefit from investing in ETFs. Equity ETFs follow a passive investment strategy by tracking a particular index. This investment option may be suitable for investors seeking to passively invest in equities.

Investors seeking to diversify their investments in the stock market may potentially benefit by investing in ETFs. Exchange traded funds invest in diversified stocks; this characteristic may potentially reduce risk as compared to individual stocks.

Investors seeking flexibility and liquidity in their investments may benefit by investing in ETFs. As exchange-traded funds are traded on the stock market investors need a DEMAT account to invest in them.

Lastly, investors seeking an investment scheme with a relatively lower expense ratio may benefit from ETF investments. As these funds are a passive investment option, they may have a lower expense ratio.

FAQs

• What is the meaning of index funds and ETFs?

  Index funds are a type of passive investment scheme that aims to generate returns by tracking a particular index. They may track indices such as Nifty 50, Nifty 100 S&P Sensex etc. ETFs are a collection of investments that allow investors to invest in a diverse range of stocks by tracking a particular index. The main difference between ETFs and Index funds lies in their flexibility.

 
• What is the difference between ETFs and Index Funds?

  ETFs trade in intraday shares and are a flexible investment. Index funds track a particular index and valuation is done at the end of the day. To trade in ETFs, investors require a DEMAT account. This is not a requirement for index mutual funds.

 
• How to choose ETFs or Index Funds?

  When comparing ETFs vs index funds it is necessary to analyse risk appetite and goals. ETF investments may be suitable for investors seeking a flexible investment and lower expense ratio. Index funds may be suitable for investors seeking a passive investment with an option for SIP.

 
• Are ETF funds a risky investment option?

  Yes, ETFs are usually considered to be a high-risk-return investment option. ETFs invest in stocks in the share market and may be vulnerable to market volatility and market risks.

 
• Are index funds returns high?

  Index funds are usually considered as a long-term investment option. In the long-term, index funds aim to help in wealth creation. However, index funds returns are dependent on market conditions and future fund performance cannot be guaranteed.

 
• Are index mutual funds in India tax-free?

  No, index fund investments are not completely tax-free. Index funds in India are subject to STCG and LTCG tax. STCG are levied on units held for less than one year at 15%. LTCG is levied on investments over ₹1 lakh, held for over 1 year at 10%.

 
• How to invest in index funds in India?

  Investors can invest in index funds in India by visiting our website. Identify the index fund you wish to invest in, click the “Invest Now” button and fill in the required details.

 
• How to invest in ETFs in India?

  To invest in exchange traded funds in India investors require a DEMAT account. Investors can invest in ETFs by visiting our website. Identify the ETF fund you wish to invest in, click the “Invest Now” button and fill in the required details.