Index fund or ETF: Which is better considering cost and liquidity?

Between index funds and ETFs, which is better considering factors such as cost and liquidity?
- Dinesh Janardhan

If you consider costs, I'd say ETFs have a slight advantage because these days, you can purchase ETFs for expense ratios as low as five to seven basis points. But, index funds are not far behind either. The direct plans of several index funds are available for an expense ratio of just about 10-15 basis points. So I'd say that there is not a huge gap between ETFs and index funds on the cost front.

On the liquidity front, there are no concerns as far as index funds are concerned because the fund house stands committed to honouring your redemption request on any working day at the applicable NAV. You need not worry about the liquidity here. In terms of ETFs, however, liquidity differs significantly across different funds. Some funds can generate very high trading volumes on a day-to-day basis, while that's not the case with others. One needs to be mindful of the trading volumes and check them before committing money to an ETF. Broadly from an investor's perspective, I'd say that people who are by and large mutual fund investors prefer index funds because it saves them from the additional hassle of opening a Demat and a trading account to be able to buy an ETF. But for people who have these accounts, ETFs are also a viable option.