1What's the difference between an index fund and an ETF?
An index fund is bought from the fund house at end-of-day NAV; an ETF trades on the exchange at live prices and needs a demat account. Both track an index at low cost.
Index funds and exchange-traded funds are the two main ways to invest passively — tracking a market index rather than betting on a manager's stock picks. They're close cousins but differ in how you buy and hold them. Here's how index funds and ETFs work, how they compare, and what to keep in mind on tax.
Reviewed by CA Harika Chebolu, FCA · Last updated 2026-06-15
Quick answer
Index funds and ETFs both track a market index at low cost, but they're bought and held differently. Here's how the two compare and which suits which investor.
Both index funds and ETFs aim to mirror a market index rather than have a manager actively pick stocks. Because they simply track the index, they tend to carry lower costs than actively managed funds. Both give you broad, diversified exposure to a market or segment in a single holding, which is why they're a popular core for long-term portfolios.
An index fund is a regular mutual fund that tracks an index. You buy and sell units directly from the fund house at the day's net asset value, just as with any other mutual fund. That makes index funds simple to run through a SIP or lump sum, with no need for a trading account, and the price you transact at is the end-of-day NAV rather than a live market price.
An exchange-traded fund also tracks an index, but its units trade on the stock exchange like shares. You buy and sell them through a demat and trading account at live market prices during trading hours. This gives intraday flexibility, but it also means the traded price can differ slightly from the underlying value, and you need a demat account to hold them.
For most investors who want a simple, automated way to invest in an index, an index fund is the easier route — no demat account, easy SIPs, and end-of-day pricing. ETFs suit investors who already have a demat account and want exchange-traded flexibility or specific exposures. The choice often comes down to convenience and whether you value intraday trading over simplicity.
For tax, both are classified by what they hold — an equity index fund or ETF follows equity fund rules, and others follow their respective category. So the gain on redemption depends on the underlying category and how long you held the units, just as with any mutual fund. The structure (fund versus ETF) doesn't change the category-based treatment; we'll apply the current rates to your holding.
An index fund is bought from the fund house at end-of-day NAV; an ETF trades on the exchange at live prices and needs a demat account. Both track an index at low cost.
They tend to carry lower costs because they track an index rather than paying for active stock-picking. That low cost is a big part of their appeal for long-term holdings.
By what they hold — an equity index fund or ETF follows equity fund rules, others follow their category. The gain depends on the underlying category and your holding period.
Deciding between index funds and ETFs? Write to the firm and we'll match the route to your setup and apply the current tax rules to your gains.