Want to build a passive portfolio? Know whether ETFs or index funds are better for you

As passive investing gains popularity, investors increasingly have to choose between two common routes — ETFs and index funds. Both seek to replicate an index at relatively low cost, but differ in how they are bought and sold, their liquidity and the convenience they offer for regular investing, as reported by ETBureau.

Passive funds are investment funds that track a market index, like the Nifty 50 or Sensex, instead of trying to beat the market. They buy the same stocks in the same amounts as the index.

Common types include index funds and exchange-traded funds (ETFs) and they are getting popular amongst investors due to their simplicity, low cost and less dependence on fund managers.

As per AMFI Crisil Factbook 2026, passive funds share of total mutual fund AUM has nearly doubled from 9.8% in 2021 to 18.6% in 2026.

ETFs and Index funds are not only available for indices such as sensex and nifty but are available across a much wider spectrum. Within equities, investors can choose products tracking broader indices as well as sectors and themes such as banking, manufacturing, metals, PSU banks, chemicals and energy. Passive options are also available in fixed income and commodities through gilt ETFs, target maturity funds, and gold and silver funds.

ETFs trade on stock exchanges like shares at market prices and require a demat and trading account. Index funds are bought or redeemed from the mutual fund at the applicable end-of-day NAV and do not require a demat account.

ETFs generally have lower expense ratios than index funds, but investors may incur other costs such as brokerage, statutory charges and the bid-ask spread when buying or selling them on an exchange. Index funds typically have slightly higher expense ratios, but investors trans act directly with the mutual fund and do not incur trading-related costs

Index funds may have additional costs and can levy exit loads, unlike ETFs. Investors should compare total costs, not just expense ratios, before choosing.

ETFs may suit active investors comfortable with trading, but liquidity should be checked. Index funds may be better for investors seeking a simpler, long-term approach with regular SIP investments.