Passive investing looks easy until you confuse index funds with ETFs. This module explains what both products track, why their costs are usually lower, how tracking error enters the picture, and why ETF price and NAV can differ.
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Short questions. Clear answers. Practical investor thinking.
The scheme follows a specified index instead of asking the manager to actively select a different portfolio.
To move broadly in line with the chosen benchmark, not to beat it through active decisions.
Because the index determines the portfolio, so active decision intensity is lower.
It holds securities based on the chosen index and usually in similar proportions.
A return that broadly tracks the market benchmark, not outperformance by design.
Yes. If the benchmark falls, the fund can fall too.
It is the gap between the scheme return and the benchmark return.
Because the whole passive promise is built on following the benchmark closely.
Lower tracking error is generally better when comparing similar passive funds.
It is an open-ended fund whose units are traded on the stock exchange.
Through the stock exchange, not directly with the fund in the same way as a normal open-ended mutual fund transaction.
Market makers provide buy and sell quotes to help liquidity in the exchange.
Because ETF units trade on the exchange through demand, supply, and market-making activity.
Often yes, but not necessarily equal to NAV at every moment.
ETF market price is a traded price. NAV is the underlying fund value per unit.
Because running costs are usually lower than active funds that depend more on portfolio calls.
Investors can bear brokerage cost because ETF units are traded on the exchange.
Because lower cost helps, but tracking quality and liquidity still matter.
Check benchmark, cost, tracking quality, and how you want to transact.
Thinking index fund and ETF are identical just because both are passive.
Pick the passive format only after understanding benchmark tracking and transaction experience.
Passive funds follow a benchmark. Index funds track, not beat, markets. Tracking error shows tracking quality.
Quote: Passive is not automatic. It still needs understanding.
Next Module: How to Choose a Mutual Fund
Disclaimer: This content is for education only, not investment advice.
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