What is an index fund?

An index fund is a mutual fund that holds the same securities as a market index, such as the Nifty 50, in the same proportions. It does not try to beat the index; it tries to match it at low cost.

What is the difference between an index fund and an ETF?

Both track an index. You buy and sell an index fund from the fund house at the end-of-day NAV. An ETF is listed on a stock exchange and trades throughout the day at the market price, so you need a demat account and a broker.

What is tracking error?

Tracking error measures how closely a fund follows its index. Because of costs and cash held, an index fund returns slightly less than its index; a smaller gap means better tracking.

Do active funds beat the index?

It depends on the category and the period. In some categories most active funds have trailed their index over long periods, in others many have beaten it, and past winners often do not repeat. Compare a fund with its category and its index over several periods.

Index funds vs ETFs vs active funds: differences explained

Written and reviewed by Omm · Last reviewed 2 October 2026 · General information, not investment advice

Active funds

A fund manager and research team pick investments to try to beat a benchmark index. You pay for that effort through a higher expense ratio. If the manager picks well enough to cover the extra cost, you gain; if not, you would have been better off in an index fund.

Index funds

An index fund simply copies an index. There is no stock-picking, so costs are low. Its return will be the index’s return minus costs, so it will never beat the index and rarely trails it by much. Index funds are available in both Direct and Regular plans, and you buy them like any other fund, including through a SIP.

ETFs

An exchange-traded fund also tracks an index (or gold, silver or bonds) but is bought and sold on a stock exchange like a share.

	Index fund	ETF
How you buy	From the fund house at NAV	On the exchange at the market price
Price	End-of-day NAV	Changes through the day
Needs a demat account	No	Yes
SIP	Easy	Possible through some brokers
Extra cost	None	Brokerage and the gap between buy and sell price
Liquidity	Redeem at NAV	Depends on trading volume

What to compare

Expense ratio: the main difference between funds tracking the same index.
Tracking error and tracking difference: how far the fund’s return falls from the index.
Size and trading volume (for ETFs): thin trading means a wider gap between the buy and sell price.

Unit splits

ETFs occasionally split their units, for example 10 new units for each old unit, so the NAV drops to a tenth overnight without any loss to investors. Raw NAV data makes this look like a crash. This site detects such splits and adjusts the history, and says so on the fund page.

Choosing

Active and passive funds are not rivals so much as tools. Many investors hold both: a low-cost index fund as the core and a few active funds. Use the “Index Fund” and ETF categories in the screener to compare passive options, and check how the active funds in a category have done against them over several periods.