Question

For the retail investor who would like to participate in a stock market, does it matter whether they choose to hold a ETF or an index fund? Which key variable drives the decision between either instrument

Answer 1

An Index fund is basically a theoretical framework, it is a term which is used for mutual funds which are designed to track the index and its stocks. If a fund invest in companies which are present in an index and tracks them without the intention of outperforming them, then the same is regarded as index funds. Index funds can not be bought by investors directly as they are not listed in the market. Public will have to purchase mutual funds that imitate index and invest in index companies.

ETF's on the other hand, are funds that are traded directly on exchange and can be bought and sold in real time. Mutual funds are only prices at the end of the day and hence they can not be bought and sold like ETF.

It does matter, if the investor chooses Index fund instead of ETF, because it is expected to generate higher return than the ETF. This is because Index based mutual funds are actively managed by professional funds managers with an aim to generate higher return with appropriate mix of large cap index stocks etc.