Is an ETF cheaper than an index fund?

Not necessarily. Expense ratio is one cost to compare directly, but an ETF purchase also typically involves brokerage and the exchange bid-ask spread, which a direct index fund purchase does not carry in the same way — the full cost comparison depends on both factors, not the expense ratio alone.

Do I need a demat account for an index fund?

No. An index fund is a mutual fund bought and redeemed directly from the fund, the same as any other mutual fund, and does not require a demat account. An ETF does, because its units trade on a stock exchange.

Can an ETF trade at a different price from the value of what it actually holds?

Yes. An ETF's market price is set by buyers and sellers on the exchange and can differ from its underlying NAV — trading at a premium when the market price is higher, or a discount when it is lower — particularly when trading in that ETF is thin.

Is a SIP possible in an ETF the way it is in an index fund?

Investing a fixed amount into an ETF on a schedule is possible, but it means placing a trade on the exchange each time through a broker, at whatever price is available then — a different mechanical process from a standard mutual fund SIP, which is processed at a single end-of-day NAV.

Which tracks its index more closely, an index fund or an ETF?

This varies by the specific fund and the specific ETF rather than by structure alone — both are subject to tracking difference and tracking error, and both are worth checking on their own track record rather than assuming one structure is inherently more precise.

Should I choose an ETF or an index fund?

That depends on how you want to invest — whether you already have a demat and trading account, whether you prefer the mechanics of a standard mutual fund SIP, and how much the premium/discount and brokerage considerations matter to you — rather than one structure being inherently better than the other.

Passive Investing · Intermediate · 7 min read

Index Fund vs ETF: What's Actually Different?

The short answer

Both an index fund and an ETF (exchange-traded fund) can track the same kind of market index, but they are structured differently. An index fund is a mutual fund: you buy and redeem units directly from the fund at its end-of-day NAV. An ETF's units trade on a stock exchange throughout the trading session at a market price, which can differ slightly from the ETF's own underlying NAV, and buying or selling one requires a demat and trading account the way a share purchase does. Neither structure is inherently the better one — they suit different ways of investing, and both remain market-linked investments.

Written and reviewed by Amit Chadha, Mutual Fund Distributor at MutualFundAdvisor.in · AMFI ARN: 349461. Last reviewed 15 September 2026.

This article is investor education only. It is not investment advice, a scheme recommendation or an assurance of returns.

An index fund and an ETF can both aim to track the same market index, and it is easy to treat the two as basically the same thing with a different name. Structurally, though, they work quite differently — in how you buy and sell them, how their price is set, and what account you need to hold one.

This article focuses on that structural difference, building on the Academy's article on what an index fund is. It does not suggest one structure suits every investor better than the other — that depends on how you want to invest, not on which product is inherently superior.

Both can track the same kind of index

An index fund and an ETF can both be built to replicate the same market index, using the same broad approach the Academy's article on index funds describes — holding the underlying securities in proportions close to the index's own weights. The passive, index-tracking objective is not what separates the two; the difference is in how each one is actually bought, sold and priced.

How an index fund is bought and redeemed

An index fund is a mutual fund. You buy units directly from the fund, or through a distributor, and redeem them back to the fund, at the NAV calculated at the end of that business day — the same NAV mechanism the Academy's article on NAV covers for any open-ended scheme. A SIP works the same way in an index fund as it does in any other mutual fund category.

How an ETF is bought and sold

An ETF's units, once created, are listed and traded on a stock exchange, the same way a company's shares are. You buy and sell ETF units through a broker during the exchange's trading hours, at whatever price the market is offering at that moment — not at a single end-of-day NAV. Because of this, an ETF requires a demat account to hold the units and a trading account to transact — the same accounts a share purchase requires, a point the Academy's article on the stock market already makes about ETFs specifically.

This also means an ETF can be bought or sold at different prices within the same trading day, the way a share can, while an index fund's units are all bought or redeemed at that one day's single NAV, regardless of what time during the day the order was placed.

Market price versus NAV — and the gap between them

An ETF still has an underlying NAV, calculated the same way a mutual fund's is, but the price you actually pay or receive on the exchange is the market price, set by buyers and sellers trading the ETF's units — not the NAV directly. These two figures are usually close but are not guaranteed to be identical.

When the market price is above the NAV, the ETF is said to trade at a premium; when it is below, a discount. This premium or discount can widen when trading in a particular ETF is thin, or during periods of market stress, and is a genuinely different consideration from an index fund's tracking difference, even though both concern how closely a product's price reflects what it actually holds.

Cost and liquidity considerations

Expense ratio remains one factor for both, in the same way the Academy's article on index funds and the article on expense ratio cover — lower cost is not automatically the deciding factor, but it is worth comparing directly. An ETF purchase or sale also typically involves brokerage and, depending on the broker and the size of the trade, the bid-ask spread on the exchange, which an index fund's direct-to-fund purchase does not carry in the same way.

Liquidity for an ETF depends partly on how actively that specific ETF is traded on the exchange — a thinly traded ETF can show a wider bid-ask spread and a larger premium or discount to NAV, which is worth checking rather than assumed to be the same across every ETF.

Which one fits a SIP

A SIP into an index fund works the same way as a SIP into any other mutual fund — a fixed amount invested on a set schedule, processed at that day's NAV. Investing a fixed amount into an ETF on a schedule is possible too, but it means placing a trade on the exchange each time, at whatever price the market is offering at that moment, through a broker — a different mechanical process from a mutual fund SIP, even when the underlying investment objective is similar.

Neither structure changes the underlying market risk. Whichever one you are comparing, the product still tracks — or aims to track — a market index, and its value can rise or fall with that market regardless of how you buy or sell it.

Key takeaways

An index fund and an ETF can track the same kind of index — the difference between them is structural, not in what they are trying to do.
An index fund is bought and redeemed directly from the fund at end-of-day NAV; an ETF trades on an exchange throughout the day at a market price.
An ETF requires a demat and trading account, the same as buying a share; an index fund does not.
An ETF's market price can differ from its own NAV — trading at a premium or a discount — which is a different consideration from an index fund's tracking difference.
Brokerage and the exchange bid-ask spread are ETF-specific costs that a direct index fund purchase does not carry in the same way.
A SIP into an index fund is a standard mutual fund SIP; investing a fixed amount into an ETF on a schedule means placing a trade on the exchange each time.

Put this to work on your own numbers

SIP Calculator
Model a standard mutual fund SIP — the mechanism an index fund uses, as distinct from placing a scheduled ETF trade.

Frequently asked questions

Sources and editorial review

Checked against the primary sources below on 15 September 2026. Scheme terms, tax rules and regulatory requirements change — confirm the current position before acting on anything here.

SEBI Investor Website
SEBI's investor material on ETFs and index funds as distinct structures within the mutual fund and exchange-traded framework.
AMFI Investor Corner
AMFI's investor education material on how ETF units are created, traded and priced relative to NAV.
NSE India
NSE's own material on how ETF units are listed and traded on the exchange, and the demat/trading account requirement.
MutualFundAdvisor.in editorial policy

What to read next

Passive InvestingWhat is an Index Fund?What an index fund is, how it tries to track a market index, how that differs from active management, and what tracking difference and tracking error actually measure.Mutual Fund BasicsWhat Is NAV in a Mutual Fund?What Net Asset Value means, how it is calculated and declared, why a low NAV does not make a fund cheap, and which NAV applies to your transaction.Choosing & Comparing Mutual FundsWhat Is the Expense Ratio of a Mutual Fund?What the Total Expense Ratio covers, how it is charged inside NAV rather than billed to you, how it compounds over a long holding period, and how to compare it properly.Mutual Fund BasicsWhat Is a Mutual Fund and How Does It Work?A plain-language introduction to pooling, units, NAV, fund categories, costs and market risk in Indian mutual funds.

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Amit Chadha is a Mutual Fund Distributor (ARN: 349461). The first conversation is free and educational.