India: Index Funds Gain Over ETFs for Simplicity

Indian retail investors are making a clear shift, increasingly favoring index funds instead of Exchange-Traded Funds (ETFs).

This trend shows investors are prioritizing ease and overall value, even when ETFs appear cheaper at first glance.

The Big Shift in Investor Choice

Index funds, which track a market index passively, have seen their popularity surge among Indian retail investors. Their share in retail passive Assets Under Management (AUM), meaning money managed by funds, jumped significantly.

• Index funds AUM share: From 11.5% in March 2021 to 55% in March 2026.
• Other ETFs AUM share: Declined sharply from 83.8% to 30.1% during the same period.
• ETF expense ratios (annual fund management fee): Typically 0.04–0.10%.
• Equivalent index fund expense ratios: Range from 0.10–0.40%.

Why ETFs Are Losing Ground

Even though ETFs, which trade like stocks on exchanges, often have lower expense ratios, they come with other costs. Economist Sharad Kohli points out these additional expenses, which can eat into returns.

• Brokerage charges: Fee for trading stocks.
• Bid-ask spreads: Difference in buy/sell price.
• Securities Transaction Tax (STT): Tax on stock trades.
• Other transaction fees.

A major issue for ETFs is poor liquidity, or how easily assets can be sold, especially for less active funds. Harendra Zatakia, Founder of Wealth Aligned Financial Advisory, advises focusing on ‘tracking difference’—the actual return compared to the index—instead of just the expense ratio when picking an ETF.

The Rise of Index Funds

The mutual fund industry has worked hard to make index funds more familiar and accessible. Campaigns and the growth of Systematic Investment Plans (SIPs) have made a big difference.

• “Mutual Funds Sahi Hai” campaigns.
• Rise of SIPs (regular, fixed investments).
• More Asset Management Companies (AMCs) and distributors.
• Growth of digital investment platforms.

For many new investors, index funds offer a simple way to get diversified stock market exposure. SIPs, allowing investments from as low as ₹500 without needing a demat account (which holds securities electronically) or paying brokerage, add to their appeal.

When to Use Each Fund Type

Prithvi Potta, Founding Partner at Wert Finserve, suggests index funds can form the core of an investment portfolio. They offer a stable, low-cost way to track the market without needing constant attention.

• Ideal for long-term investors.
• Good for those with monthly surpluses.
• Perfect for first-time equity investors.
• Suitable for salaried individuals building goal-linked SIPs.
• Also for seasoned investors avoiding active fund manager selection.

Harsh Vardhan Dawar of Wealth Café Investment Advisors warns that the live pricing of ETFs can tempt retail investors into frequent trading. This can undermine the benefits of compounding, which is earning returns on returns.

ETFs still have their place for lump-sum investments or for exposure to assets like gold and international markets. Both ETFs and index funds are useful for proper asset allocation, or spreading investments across different asset types.