Index Funds v/s ETFs

ETFs do not pay commissions to MF agents or brokers - they are traded as shares on the stock exchange. This means you have to buy them - they are not sold. Also the fund houses typically allocate low advertising budget to them, which is good for the long term investors, as it means low expense ratio.

Index Funds on the other hand are available with most of the fund houses. Though they are not actively marketed (low entry load & low expense ratio turn into low commissions on sale & continuity), they may be offered by financial planners, if you care to ask.

However, the important question for any investor is - should he/she go for Index Fund or ETF? Here are some tips that might be of help:

ETFs have to be bought from the market (if you are a small investor) or directly from the fund house (if you are a very large investor) - in either case, there are no commissions to be made by the MF agentat the time of purchase (via entry load), or retention (via trailing fees). These are best for investors with these characteristics:
a. Very long term buy & hold approach (to offset the brokerage at purchase & sale), as the expense ratio is lower than Index Funds
b. Already have a Demat account (to reduce total cost of ownership)
c. Have a good brokerage deal (to reduce cost of purchase or sale)
d. Making purchases large enough to get reasonable brokerage rates (please note that some brokers might require minimum transaction value or impose a minimum brokerage fee).

Index Funds have entry load of 0% (for a few funds) or 1% (for most - though I wonder how they manage to get investors). This is usually set-off via exit load for short-term redemption. The expense ratio is about 1% (or less for few funds) to 2% (again, I wonder how they manage to get investors). The combination of these low fees ensure you get market return minus expenses in the long term, while your agent gets low trail commissions only. These are best for investors with these characteristics:
a. Low investment amount - usually in thousands
b. Need for regular investment vehicle - due to affordability issues
c. Need to reduce volatility via regular investment v/s lump-sum
d. Not having Demat Account or PAN, etc.
e. Willingness to accept self-service - do not expect any MF agent to be interested in a client like you...