ETF vs Index Mutual Fund 2026

Why Index Funds Often Work Better for SIP Investors (Even When ETFs Look Cheaper)

ETFs are widely marketed as the cheapest way to invest in the stock market.

They usually show:

• Much lower expense ratios (TER)

• Exchange-traded liquidity

• Transparency and flexibility

On paper, ETFs often look far cheaper than index mutual funds.

Yet, for many long-term SIP investors in India, index mutual funds frequently deliver equal or better outcomes, despite having a higher TER.

This is not because ETFs are flawed products — it’s because costs show up differently depending on how you invest.

Why TER Alone Is Not the Full Cost

Most ETF vs index fund comparisons stop at TER.
That comparison is incomplete.

Realistic TER Ranges in India (Direct Plans)

• Large-cap index mutual funds: ~0.15%–0.35%

• Large-cap index ETFs: ~0.02%–0.10%

The TER gap is often 0.10%–0.25%, not always dramatic.

So why do SIP investors still often prefer index mutual funds?

The answer lies in execution mechanics and trading friction.

Structural Difference: How You Buy and Sell

Index Mutual Funds

• Units are bought directly from the AMC

• Transactions happen exactly at NAV

• Every rupee is invested

• Liquidity is guaranteed by the fund house

• No bid-ask spread

• No brokerage

If NAV is ₹100, your ₹10,000 buys ₹10,000 worth of assets.

ETFs

• You do not buy from the AMC

• You buy on the stock exchange

• Liquidity is provided by Authorised Participants (APs)

• You transact at market prices, not NAV

This introduces trading friction that does not appear in TER.

The Hidden Cost: Bid–Ask Spread

ETFs trade with:

• A bid price (what buyers pay)

• An ask price (what sellers charge)

The difference is the bid–ask spread.

You pay this cost:

• When you buy (at the ask)

• When you sell (at the bid)

This cost:

• Is not included in TER

• Varies by liquidity

• Increases during volatility or low volumes

How Big Are These Frictions in India?

It depends on the ETF.

Typical Ranges (India)

• Highly liquid ETFs (Nifty 50, Sensex):

  • Spread: ~0.05%–0.15%

  • Brokerage & charges (discount broker): ~0.02%–0.05%

• Moderately liquid ETFs:

  • Spread: ~0.20%–0.30%

  • Brokerage: ~0.05%–0.10%

Thinly traded ETFs can be worse.

So the ETF cost disadvantage is not universal — it is liquidity-dependent.

A Real Indian Example: Nifty 50 ETF vs Nifty 50 Index Fund

To ground this discussion, let’s compare two widely used products tracking the same index.

ETF: Nippon India ETF Nifty 50 (NIFTYBEES)

• Structure: ETF

• Index tracked: Nifty 50

• TER (recent years): ~0.03%–0.05%

• Liquidity: Very high (among the most traded ETFs in India)

• Typical bid-ask spread (normal conditions): ~0.05%–0.15%

• Execution: Market price (may differ slightly from NAV)

Index Mutual Fund: HDFC Nifty 50 Index Fund – Direct Plan

• Structure: Index mutual fund

• Index tracked: Nifty 50

• TER (direct plan): ~0.20%–0.30%

• Liquidity: AMC-guaranteed

• Bid-ask spread: None

• Execution: Exactly at NAV

Both track the same index, so gross market returns are identical before costs.

Historical Return Context

The Nifty 50 index itself has delivered roughly 11–12% CAGR over long periods (10–20 years, depending on start and end dates).

Therefore, any long-term difference between these two products comes from:

• TER

• Tracking difference

• Trading friction

• Execution quality

Not from stock selection.

SIP Cost Comparison (Scenario-Based, Explicit)

Assumptions

• Monthly SIP: ₹10,000

• Horizon: 15 years

• Gross market return: 12%

• ETF TER: 0.05%

• Index fund TER: 0.25%

• ETF buy-side friction: ~0.10%–0.15%

• ETF sell-side friction at exit: ~0.10%–0.15%

This models a high-liquidity ETF, not a thin one.

What Happens in Practice

Index Mutual Fund SIP

• ₹10,000 invested fully every month

• Cost deducted smoothly via TER

• No execution friction

ETF SIP

• ₹10,000 invested

• ~₹10–₹15 lost immediately to entry friction

• Exit friction applies again at redemption

• Friction repeats every month

Individually small costs become meaningful when repeated 180 times.

15-Year Outcome (Illustrative)

Under these assumptions:

• Index fund net CAGR: ~11.7%

• ETF net CAGR: ~11.2%–11.3%

On ₹18 lakh invested via SIP:

• Index fund corpus: ~₹52–54 lakh

• ETF corpus: ~₹47–50 lakh

Difference: ~₹3–6 lakh over 15 years

This is not a rule, but a plausible outcome under realistic costs.

Can the ETF Still Win?

Yes.

ETFs like NIFTYBEES can outperform index funds when:

• Investment is lump sum

• Brokerage is extremely low

• Orders are placed carefully

• Index fund TER is at the higher end

• Trading frequency is minimal

ETFs are excellent instruments — just not always ideal for SIP behaviour.

Behaviour and Practical Reality

Most SIP investors want:

• Automation

• Predictable execution

• Minimal friction

• No need to time trades

Index mutual funds align better with this behaviour.

ETFs are fundamentally trading instruments, even when used for investing.

Final Verdict (Balanced)

Key Takeaway

ETFs are not inferior.
Index funds are not overpriced.

They are built for different use cases.

For most retail SIP investors in India, index mutual funds usually compound more efficiently, even with slightly higher TER — because they eliminate trading friction.

In long-term investing, the real cost is not what you see on paper, it’s what quietly compounds against you.