Why are Indian investors increasingly choosing index funds over their 'cheaper cousin' ETFs?

Index funds have witnessed a dramatic rise in popularity among retail investors over the past five years, accounting for a much larger share of their passive mutual fund assets than they did in 2021.

The share of index funds in retail passive AUM jumped from 11.5% in March 2021 to 55% in March 2026, according to the AMFI-Crisil Factbook 2026.

Meanwhile, the share of other Exchange-Traded Funds (ETFs) fell sharply from 83.8% to 30.1%, over the same period.

This shift in the passive investing category comes despite ETFs being considered the “cheaper” option because of their low expense ratios, which refers to the annual fee charged for managing and operating the fund.

Are ETFs really cheaper?

ETFs expense ratios typically range from 0.04–0.10%, compared with 0.10–0.40% for equivalent index funds. However, experts who spoke to Livemint warned against treating cost as the sole factor when choosing between the two.

Explaining the reasons, economist and market expert Sharad Kohli noted that while ETFs may appear more economical due to their lower expense ratios, investors may incur additional costs. These include brokerage charges, bid-ask spread, STT and other transaction costs, he said.

“And sometimes, selling ETFs due to poor liquidity can be a pain. There are times when investors have been found waiting to liquidate their ETFs, which becomes a huge disadvantage, especially when you get trapped in an ETF that has very low liquidity," the expert added.

The liquidity issue is not new. Even within a single category such as large-cap ETFs, a small number of funds account for the overwhelming majority of daily trading, leaving dozens of similarly named alternatives with thin liquidity, making them harder to exit quickly, according to a Value Research report.

While picking an ETF, investors are also advised to look at tracking difference, because the actual return delivered relative to the index is more relevant than simply choosing the fund with the lowest expense ratio, said Harendra Zatakia, a Sebi RIA and the Founder of Wealth Aligned Financial Advisory.

Why are more retail investors putting their money in index funds?

The mutual-fund industry has spent years building familiarity around the MF format, especially with measures such as the “Mutual Funds Sahi Hai” campaign, growth of SIPs, AMCs, distributors and digital investment platforms.

According to Zatakia, all these combined efforts have made mutual funds a familiar investment vehicle for millions of investors.

“A large number of new investors entering the market today are also first-time equity investors. For them, an index fund can be a relatively simple way to get diversified equity exposure and experience equity investing before exploring more complex products,” he said.

Another major factor that's contributing to its growth is that mutual funds offer convenient SIPs and allow investors to deploy an exact rupee amount, rather than generally having to buy whole ETF units on the exchange.

Where does index funds fit in your portfolio?

An index fund can form the core of a portfolio by offering a steady, low-cost way to track the market without needing regular monitoring, according to Prithvi Potta, Founding Partner at Wert Finserve.

According to him, it suits any individual who is investing for the long term with a monthly surplus. “This can include first-time investors, salaried people building a goal-linked SIP, or seasoned investors who no longer want to bet on picking the right fund manager,” he added.

Potta also reiterated that starting at ₹500, with no demat account and no brokerage, makes it a genuinely simple wealth-accumulation tool.

Meanwhile, ETFs can be useful for lump-sum deployment or for gold and international exposure, where the structure typically works better. “And the caution is fair: a live price on the screen tempts people to trade a product they bought to hold, which is exactly how retail investors lose the benefit of compounding” the expert noted.

Adding to these points, Wealth Café Investment Advisors' Harsh Vardhan Dawar noted that each investor must have a proper asset allocation towards debt, equity and gold, among other asset classes.

“In addition to equity, one must have allocation towards large, small and mid cap funds and within this allocation, the investor must look for how the index fund or ETF can be included,” he said, adding that ETFs and index funds work well towards the large cap passive allocation for an investor's portfolio.

According to Dawar, index fund is meant for non-active investor while ETF is a better choice for a frequent or active investor.