ETF vs index fund: what is the difference, and is an ETF a mutual fund?

An ETF and an index fund both copy an index, and SEBI puts them in one category with the same rules. An index fund is bought from and sold to the fund house at that day's NAV. An ETF trades on the stock exchange like a share, at a market price, and needs a demat account.

An index is a list of companies picked by fixed rules, whose combined value is tracked every day. A unit is one undivided share in everything a scheme holds. NAV is the price of one unit of a fund.

ETF or index fund: what is the difference?

The difference is how you buy and sell, not what the fund holds. Both must hold at least 95% of total assets in their index's securities, and must rebalance within 7 calendar days of an index change.

An ETF (exchange traded fund) is a fund whose units are listed on a stock exchange. What an ETF is, and the kinds on offer, is in our ETF guide.

A Nifty 50 index fund and a Nifty 50 ETF both follow the same index. The Nifty 50 holds 50 large, easily traded companies from the Nifty 100, weighted by the value of shares available to the public. NSE reviews it every six months. Its stocks make up about 66% of the free-float market capitalisation of NSE, the combined value of shares open to public trading.

Is an ETF a mutual fund?

Yes. An ETF is a mutual fund scheme whose units are listed and traded on a stock exchange.

An index fund is a mutual fund too. SEBI files both under one heading, "Index Funds/ETFs", inside its "Other" group of schemes.

For how index funds differ from actively managed ones, read active vs passive mutual funds.

How do you buy and sell each one?

You buy an index fund from the fund house or through a distributor, and an ETF from another investor on the exchange. A distributor such as Koshex is a registered intermediary that helps you buy and manage funds. For an ETF you also need a broker, the firm that places your buy and sell orders on the exchange.

Index fund. When you buy, you get the closing NAV of the day your money reaches the fund, with a 3:00 pm cut-off. A sale request made by 3:00 pm on a business day gets that day's NAV. There is no entry load. A SIP is investing a fixed amount at regular intervals, usually monthly, and each scheme sets whether it offers one and on which dates. Sale money reaches you within 3 working days, or 5 for schemes that are mostly overseas.

For more on the cut-off, see mutual fund cut-off timings. For the SIP basics, see what a SIP is.

ETF. To buy an ETF you need a demat and trading account. A demat account keeps your units in electronic form. SEBI's rules say an investor who wants to trade units on an exchange must hold them in demat form. You can buy as little as one unit.

The 3:00 pm cut-off does not apply to units traded on an exchange. You trade whenever the market is open, at the price on screen. The fund house deals directly only with market makers and with orders above ₹25 crore. Market makers are exchange members who must keep quoting prices. SEBI requires at least two for every ETF.

An ETF has no SIP with the fund house. You can still buy units regularly through your broker, at whatever the market price is on the day. An index fund takes a normal SIP.

Koshex is a mutual fund distributor. Its fund lists show index funds and funds of funds, which you buy like any other mutual fund. ETFs trade on the stock exchange and are not listed there. To see what index funds are on offer, start at the index funds category page. Our guide on whether you need a demat account for mutual funds covers the other side.

Why can the price of an ETF differ from its NAV?

On the exchange the price is whatever buyers and sellers agree. The NAV is the value of what the fund holds, worked out once a day. An index fund has no such gap. You deal at NAV.

While the market is open, every ETF shows an indicative NAV, called iNAV, on the exchange. For an equity ETF it updates at least every 15 seconds. That lets you see whether the price you are paying is close to what the holdings are worth.

Here is a made-up example. Say an ETF's NAV is ₹250 and it trades at ₹251.25. That is a premium of 0.5%, meaning above its NAV. Buying 200 units costs ₹50,250, before your broker's charges, for units worth ₹50,000 at NAV. Put ₹50,000 into an index fund on the same index and you buy at that day's NAV. At a NAV of ₹250, that is 200 units, before stamp duty. The ETF price can also sit below NAV, which is called a discount.

SEBI built a remedy for a persistent discount. If an ETF closes more than 1% below NAV for 7 continuous trading days, investors can sell back to the fund house. The same applies after 3 consecutive trading days with no quotes. The limit is ₹25 crore, with no exit load, and applications made by 3:00 pm get that day's closing NAV.

Since 7 September 2026, an equity ETF's price can move 10% from the previous close before trading pauses briefly. The most it can move in a day is 20%. This limits wild swings but does not tie the price to NAV. The market makers and the indicative NAV do that.

What does each cost you?

Both have a base yearly fee that SEBI caps at 0.90% of daily net assets, and an ETF adds your broker's charges each time you trade. The yearly fee is the expense ratio: shown as a percentage of your money and taken out of the fund's value. You are not billed for it separately.

SEBI's 0.90% ceiling applies to the base expense ratio, as a share of daily net assets. The total expense ratio adds the fund's brokerage and transaction costs and statutory levies such as GST.

The ceiling is a ceiling, not a price. Each fund sets its own. As an illustration with assumed fees, an expense ratio of 0.20% on ₹50,000 comes to ₹100 a year, and 0.50% comes to ₹250. Compare the actual funds you are looking at. For more, see what an expense ratio is.

There is no entry load on any mutual fund scheme. An exit load is a fee some funds charge if you sell within a set time after buying. SEBI sets none for index funds, so each fund house decides. Two Nifty 50 index fund documents show how it varies. One charges 0.25% if units are sold within 3 days of allotment and nothing after. The other shows nil. An ETF sold on the exchange carries no exit load.

Selling equity ETF units on the exchange also attracts securities transaction tax, or STT, a small tax deducted on the sale. One fund house's documents give 0.001% of the sale value, paid by the seller.

What are tracking error and tracking difference?

These measure how far a fund strays from its index. SEBI defines tracking error by how much the daily gap between the index's returns and the fund's NAV returns varies, measured over the past year. Tracking difference is the yearly gap between the index's daily returns and the NAV's.

For ETFs and index funds other than debt ones, tracking error must not exceed 2%. Both kinds of fund disclose tracking error daily and tracking difference monthly, on the fund house's and AMFI's websites. For equity passive funds, the target is a tracking difference of 0.50 percentage points above the fund's own fee.

Check the tracking difference of the specific funds you are comparing, and do not assume either kind always tracks better.

How are ETFs and index funds taxed?

An equity ETF and an equity index fund on the same Indian index are taxed on the same 12-month line. Units are short-term if held 12 months or less. The holding period is how long you have owned a unit, from the day you bought it to the day you sell it.

A fund is equity-oriented if it holds at least 65% in Indian listed shares, and domestic equity index funds meet that test. For a resident individual in tax year 2026-27, an equity-oriented fund's short-term gain, on units held 12 months or less, is taxed at 20%. A gain on units held more than 12 months is taxed at 12.5% on the amount above ₹1,25,000 in a tax year. That allowance is one per person.

The exchange sale of an equity-oriented ETF is chargeable to STT. That is why the same equity rates apply to it.

Other ETFs differ. A listed ETF unit is long-term after 12 months, while an unlisted unit of a non-equity fund needs 24 months. Gold, silver and international ETFs are listed, so they turn long-term after 12 months. Their fund-of-funds versions are unlisted and need 24 months. ETF or fund of funds compares the two.

Debt ETFs and debt index funds bought on or after 1 April 2023 are taxed at slab rates, whatever the holding period. An index fund deducts no TDS, tax taken before the money reaches you, from a resident's redemption gains. For worked numbers, see how SIP returns are taxed.

Which suits which kind of investor?

An index fund suits someone who wants to invest through a fund house, often by SIP, without a demat account. An ETF suits someone who already trades on the exchange and wants to buy and sell during market hours. Neither is the better product in general.

These are the factors that decide it:

• Accounts. Do you already have a demat account and a broker, or would you have to open them?
• Habit. Do you want a monthly SIP with the fund house, or are you comfortable placing a buy order each time?
• Trading. Does a price that changes during the day matter to you, or is a single daily NAV enough?
• Price against NAV. Are you happy to check the iNAV before each buy?
• Risk. The wrapper does not change the risk. It follows the index. Almost every listed index fund read Very High on the riskometer, the risk label SEBI makes every fund show, on 29 September 2026.

Koshex, as a distributor, helps you choose a fund that suits your goal and timeline. Browse the mutual funds on Koshex to see what is listed.