Over the past five years, Indian retail investors have increasingly turned to index mutual funds, with assets under management in Nifty‑linked schemes climbing to over ₹2 trillion, according to data from AMFI. The surge has been most evident among salaried professionals who prefer the simplicity of systematic investment plans (SIPs) and the ability to invest in rupee‑denominated units without worrying about lot sizes. While exchange‑traded funds (ETFs) typically charge lower expense ratios, they have not enjoyed the same uptake among the mass market. Several practical factors explain the preference. ETFs trade like stocks, meaning investors must pay brokerage fees on every purchase or sale, which can erode returns for small, regular investors.
Moreover, the minimum transaction size—often a full lot of 50 or 100 units—creates a higher entry barrier compared with the ₹500‑₹1,000 SIPs common in index funds. Tax treatment also differs: capital gains on ETFs are subject to long‑term capital gains tax only after a year, whereas index funds attract a more straightforward tax structure under the equity‑linked savings scheme (ELSS) framework. Combined with limited awareness and the need for a demat account, these frictions make ETFs less attractive for everyday investors. The shift has implications for the broader market. Larger passive inflows into Nifty index funds can smoothen price discovery and reduce volatility in the Sensex and Nifty, as fund managers buy or sell in proportion to index movements.
For the average investor, the trade‑off is clear: index funds may carry a slightly higher expense ratio than ETFs, but they offer lower transaction costs, easier access, and the convenience of automated SIPs. Looking ahead, regulators are exploring ways to improve ETF liquidity and reduce brokerage charges, which could narrow the gap. Until such reforms materialise, Indian retail investors are likely to stay with index funds as the preferred vehicle for low‑cost, diversified equity exposure.