ETF s vs Index Funds

ETF's are basicaly funds of funds that is a fund made out of different funds. Like several MF's clubed together to form a single fund. It can even have closed or open ended versions in the fund.

Index funds are funds that track the Index. It will either contain blue chips or stocks that mimic the blue chip returns.

Basically an index fund tries to replicate the performance of a market index like sensex, S&P 500 etc whereas an exchange traded fund tries to mirror the performance of a basket of securities that trade on an exchange like a single stock.

ETF have lower tracking error, cost advantage, better structure and trading features etc and also offer hedging and arbitrage opportunities.

In effect all mutual fund schemes can now be E.T.Fs(Exchange Traded Funds) depending upon the discretion of the Asset Management Company and the relevant stock exchange.All mutual fund customers can now buy/sell mutual fund units through the stock exchange.For that they will need a Demat&Trading account and need to deposit the required funds with their Stock Brokers beforehand.Existing units can also be traded after dematerialisation.                              I have quoted a small part of the relevant SEBI Circular for your reference.THE FULL CIRCULAR IS AVAILABLE AT THE SEBI WEBSITE should you require any further information.`DEPUTY GENERAL MANAGER
INVESTMENT MANAGEMENT DEPARTMENT
SEBI /IMD / CIR No.11/183204/ 2009
November 13, 2009
All Mutual Funds/ Asset Management Companies (AMCs)/
Association of Mutual Funds in India (AMFI)
Recognised Stock Exchanges/ Depositories /Registrar to an Issue and Share Transfer Agents
Sir / Madam,
Sub: Facilitating transactions in Mutual Fund schemes through the Stock Exchange
infrastructure
1. The need for enhancing the reach of mutual fund schemes to more towns and cities has
been aired through various forums/ channels. To address this issue, various models have
been debated and discussed.
2. The infrastructure that already exists for the secondary market transactions through the
Stock exchanges with its reach to over 1500 towns and cities, through over 200,000
Stock Exchange terminals can be used for facilitating transactions in mutual fund
schemes. The Stock Exchange mechanism would also extend the present convenience
available to secondary market investors to mutual fund investors.
3. Units of mutual fund schemes may be permitted to be transacted through registered stock
brokers of recognized stock exchanges and such stock brokers will be eligible to be
considered as official points of acceptance as per SEBI Circular No. SEBI/IMD/CIR
No.11/78450/06 dated October 11, 2006........cont...2pages.`      P.S-Now obviously Index funds will also be exchange traded....THERE WILL BE NO DIFFERENCE.

Since ETFs are flexible investment vehicles, they appeal to a broad segment of the investing public. Passive investors and active traders alike find the features of ETFs attractive.

Passive institutional investors love ETFs for their flexibility. Many see them as a great alternative to futures. For example, ETFs can be purchased in smaller sizes. They also don't require special documentation, special accounts, rollover costs or margin. Furthermore, some ETFs cover benchmarks where there are no futures contracts.

Active traders, including hedge funds, love ETFs for their convenience, because they can be traded as easily as stocks. This means they have margin and trading flexibility that is unmatched by index funds. Ironically, ETFs are exempt from the short sale up tick rule that plagues regular stocks (the short sale up tick rule prevents short sellers from shorting a stock unless the last trade resulted in a price increase).

Passive retail investors, for their part, will love index funds for their simplicity. Investors do not need a brokerage account or deposit with index funds. They can usually be purchased through the investor's bank. This keeps things simple for investors - a consideration that the investment advisory community continues to overlook.