Differences Between the Index Fund vs Equity Fund
- 28th January 2026
- 05:20 PM
- 9 min read
An index fund is a sort of mutual fund which invests in securities of a chosen market index, such as Nifty 50, etc, and attempts to mirror its performance. An equity fund is also a mutual fund type but invests your money across company stocks and other equity-related assets, and potentially capitalises on the growth of those equity instruments.
As per the AMFI, the current AUM of the Indian mutual fund industry stands at INR 80.80 lakh crore or INR 80.80 trillion. With this increasing popularity, if you also want to grow a corpus for the future, note the key differences between index fund vs equity fund and invest informedly.
What are Equity Funds?
Equity funds are generally actively managed mutual fund schemes that invest in company stocks. Such funds also invest in equity-related instruments such as derivatives, i.e. futures and options.
As one of the key differential factors between equity vs index fund, equity funds aim to capitalise on the growth of the stocks and other equity-related instruments. Thus, it has the potential to provide capital appreciation for investors.
However, as these are related to company stocks, the involved risk is much higher. Depending on company types, there are equity fund options available, such as large-cap, mid-cap, small-cap, sectoral or thematic funds, etc.
What are Index Funds?
As the name implies, index funds are an investment avenue whose aim is to replicate the performance of a certain market index. Such indices might be Nifty 50, Nifty Midcap 100 and more.
Comparing index vs equity fund here, the index funds are a passively managed fund, which potentially allows for diversification at a much lower cost than the former.
To track a specific market index, such funds invest at least 95% of their assets across the same assets in the same proportion as the index they mimic. However, being a cost-effective investment option for diversification, it is prone to a tracking error.
It means the difference between the performance of the benchmark index and the performance of the fund itself. A tracking error means that the fund might not accurately replicate the performance of its index. Thus, it might result in returns that differ from the benchmark despite following the same asset composition.
Key Differences Between Index Fund vs Equity Funds
Based on factors such as management style, diversification, costs, etc, here is a detailed view of the differentiating factors:
Factors that Differentiate Index Funds and Equity Funds
Here are 5 key factors that differentiate these two fund investment options:
| Parameters | Equity Mutual Funds | Index Funds |
| Underlying assets | It invests at least 65% to up to 80% of its assets across company stocks based on their market capitalisation. | It invests up to 95% of its assets across securities in the same proportion as the index it follows. |
| Management Costs | As per the SEBI, investing in this involves paying an expense ratio or a management fee between 1.05% and 2.25% | On average, the expense ratio stays under 0.5% of the total AUM of an index fund in India. |
| Diversification | Diversification here depends on the capitalisation, sector or themes, etc. | Its diversification depends on the underlying assets of the index that it follows. |
| Potential of Return | Such funds might outperform the market, providing a capital appreciation, or they might underperform. | It attempts to mimic the specific index to provide an optimised return. It does not outperform an index. |
| Involved risks | Higher risks are involved as the equity market is usually highly volatile. | Lower risks are involved as it tracks a broader market index. |
With PL Capital Group – Prabhudas Lilladher, invest in mutual funds, equities, gold bonds and more to grow a corpus. Download the PL Capital app to start your investments!
Which One Suits You Between the Index Fund vs Equity Fund?
Now that you have a detailed understanding of the differences between an index fund and an equity fund, you must note some of the suitability factors before you choose one:
-
Knowledge of Investments
Investing in equity mutual funds might require a bit of knowledge of how the stock market works for analysis, making it suitable for a knowledgeable investor. Contrarily, as an index fund is simpler and more passive, it might be attractive to you if you are new to investing.
-
Cost Effectiveness
If you are someone looking for diversification at a lower cost and simplicity, an index fund might be suitable for you. As the expense ratios of equity mutual funds are generally higher, you must be comfortable with carrying additional expenses.
-
Investment Horizon
As equity funds are more prone to volatility, you must stay invested for a longer term. If you prefer staying invested for at least 5 to 10 years in such funds, chances of capital appreciation might be higher. If you are looking for a shorter investment, you might opt for an index fund.
Taxation Norms in Index Fund vs Equity Fund in India
Depending on how long you hold fund units, sell them and make gains, you get taxed as per the STCG and LTCG tax norms declared by the Indian Income Tax Department. Here is a detailed view:
-
Short-Term Capital Gain or STCG Tax
Whether it is an equity fund or an index fund, the same rule of STCG applies to both of them. If you hold units for less than 1 year, sell them and make gains, you are liable to an STCG tax. You pay the STCG at 20% with applicable CESS and surcharge.
-
Long Term Capital Gain Tax or LTCG
If you purchase fund units of index or equity mutual funds, hold them for more than 1 year and sell them to book a capital gain, you attract an LTCG tax. As per the updated tax norms, you must pay a 12.5% LTCG tax after an INR 1.25 lakh exemption.
How to Choose Between Index and Equity Funds?
Aside from the suitability factors between the index fund vs equity fund, you must also consider the following pointers:
-
Risk Appetite
Equity funds usually try to outperform the market to generate optimised returns. However, there are chances of underperformance, which increases the risk. Thus, with a higher risk appetite, you might opt for equity funds. On the other hand, if you are aiming for a return that is aligned with the market, choosing an index fund might be effective.
-
Review Fund Performance
For equity mutual funds, you must consider how much the respective fund manager has been effective and generated an optimised annualised return over the years. For index funds, aside from historical performance, you might need to check their tracking error amount.
-
Look for Guidance
Especially if you are new to investment, you can consult with professional financial experts such as PL for an informed investment decision.
Conclusion
While investing, you might get confused between an index fund vs equity fund and wonder where to invest. With more risks and a longer investment horizon, you can look for potential capital appreciation with equity funds. To make potential gains as the market performs and to gain diversification at a lower cost and risk, opt for an index fund.
PL makes investments like mutual funds, stocks, and gold bonds easy with its user-friendly interface. Download the app, create a Demat and start investing today!
FAQs on Index Fund vs Equity Fund
1. What is the main difference between an index fund and equity fund?
The main difference between an index fund and an equity fund is based on their investment strategies. Index funds invest in the exact assets of the market index they follow and aim to replicate it. Equity funds invest in company stocks and equity-related instruments and aim to outperform the market.
2. Which is better between an index fund and an equity fund?
Both have their inherent pros and cons in terms of investment. However, equity fund investment requires a higher risk appetite and a long-term investment. Contrarily, as an index fund covers a broader market index, the risk is relatively lower and is usually suitable for a short investment horizon.
3. Are index funds safer than equity funds?
As index funds hold a diversified portfolio to follow a certain market index, the risks are relatively lower than those of active funds, such as equity funds.
4. How do index funds and equity funds differ in terms of returns?
Index funds track broader market indices and aim to replicate the performance of their indices to generate returns. While equity funds aim to capitalise on the growth of company stocks and deliver returns.
5. What are the tax implications of index vs equity funds in India?
In terms of holding period, STCG and LTCG taxes apply to both types of funds in the same way. For holding units and making gains within a year, you are liable to a 20% STCG with CESS. For holding units more than a year, you pay an LTCG of 12.5% over an exemption of INR 1.25 lakh.
6. Which type of fund is better for beginners?
As a beginner, due to simplicity and diversification at a lower cost, an index fund might be suitable for you.
7. Can I invest in both equity and index funds through PL India?
Using the PL Capital app, you can explore equity or index funds. Choose one that matches your preferences and invest.
