They are both passive funds, meaning they both track an index, say Nifty or Sensex.
Though both are passive funds, there are five significant differences.
ETFs are slightly cheaper than index funds.
ETFs can be bought and sold on stock exchanges, which means their NAV (price) is available throughout the day. But with index funds, its NAV is released just once daily.
A mismatch between demand and supply can cause ETFs to trade at a premium or discount to their NAVs. That’s not the case with index funds.
In-demand ETFs can be easily bought and sold. However, those with low demand can suffer from liquidity issues. Index funds don’t have such problems.
To buy and sell ETFs, you need a demat account. You don’t need a demat account to invest in an index fund.
ETFs have lower costs, but index funds are convenient.