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Index Funds or ETFs?

ETFs are a better option for investors from various viewpoints

I would like to know the difference between the index funds and ETFs. Which one is a better option?

Both are index funds. Index funds are open index funds, and your money is invested in the same weightage and same companies that constitute the index.

ETFs are managed more efficiently in India, while the index funds, whether they track Sensex or the Nifty, have a high tracking error. The reason is that when you invest in a fund it takes some time for the money to be available to be invested. By the time the fund house buys the stock for you and the time when you invest with the fund has its own time lag.

Index funds are relatively less costly and SEBI regulation puts a limit to what the funds can charge from their customers (1.50%) in index funds. For an Index fund even this 1.5 per cent is a lot. And compared to the restrictions under which the index funds work, they always will have a tracking error.

Therefore, ETFs are a better option, they trace the index very well. And the expense is also less as they just charge 0.5 per cent as expense.

If you intend to follow an index, then ETFs are a better option.

I have two investment via SIPs. One is in Reliance Diversified Power Sector and the other is ICICI Prudential Infrastructure Fund. I have been investing Rs 5,000 for the last two years. I plan to invest for the next 4-5 years. Should I continue these investments?

Both the funds are thematic in nature. These are good funds, but not excellent choices for an investor like you.  For someone who is going to invest for some time into the future, the best option is to invest in equity diversified funds. A sector fund is a very good vehicle for an opportunistic bet, but if the sector fails, then it will show up as a loss. Choose a good diversified equity fund as it will provide the necessary spread for your risk.

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