Two vehicles, one philosophy.
Here's how they work, and how to tell if one you're looking at is actually any good.
Index funds and ETFs are both passively managed — their entire job is to replicate a rule-based index, in the same proportion as the index itself.
Say an index has 3 stocks — weighted 50%, 25% and 25%. Invest ₹100 through an index fund tracking it, and here's exactly where your money goes:
In real life there's a small gap — fund costs and tracking error — but that's the basic deal.
Both track the same kind of index. How you buy them, and what you need to get started, is where they split.
Most people only look at cost. A genuinely good fund is a combination of all four.
The expense ratio is what the fund charges you every year. Lower TER means more of the market's return actually reaches your account.
Bigger funds (higher assets under management) are usually run more efficiently and tend to be more stable over time.
This shows how closely the fund copies its index day-to-day. Lower tracking error means it's doing its one job well.
This is the actual gap between what the index returned and what the fund gave you. Smaller gap, better fund.
An index fund is bought and sold once a day at closing price, like a regular mutual fund SIP, with no demat account needed. An ETF trades all day on the stock exchange like a stock, and needs a demat and trading account.
ETFs are usually slightly cheaper, but index funds are simpler for beginners and SIP investors since they don't require a demat account.
Four things: the expense ratio (TER), the fund's size (AUM), tracking error, and tracking difference versus the index it follows. See our live fund data table for actual current numbers across Indian index funds and ETFs.
It measures how closely a fund's day-to-day movement matches its underlying index. A lower tracking error means the fund is copying the index more faithfully. SEBI requires AMCs to disclose this daily.
Source: SEBI
Yes — index funds still carry full market risk. If the index falls, the fund falls too. They remove company-specific risk, not market-wide risk — see our breakdown of the two kinds of risk for the full picture.