The cheaper sticker is not the cheaper hold

A friend texted me on Saturday, pretty pleased with himself.

He had found a Nifty 50 ETF charging 0.04 pct a year. The index fund he runs his SIP into charges 0.07. So he wanted to switch and keep the difference. Lower number, must be cheaper.

I get why it looks that way. The expense ratio is the one number every comparison leads with. But it is a single line on a longer receipt, and the rest of that receipt only shows up if you know how the two wrappers actually trade.

An index fund transacts at NAV. You send money, you get units at the day's value, done. An ETF trades like a stock. That sounds like a feature until you are a monthly SIP investor, because now you pay the trading costs twelve times a year instead of zero.

Pull the lines the sticker leaves out. On a Rs 10000 monthly buy you cover brokerage of roughly Rs 20. You cover the bid-ask spread. You fill at whatever price the ETF is quoting against its fair value, with a demat charge sitting underneath all of it. None of that touches the index fund.

Here is the flip. That Rs 20 order alone is 0.20 pct gone, before the spread. One line eats about seven times the 0.03 pct the ETF saved on the sticker.

The ETF is not the villain in this. For a one-shot lump sum in a liquid ETF you buy once and forget, that low TER is real money saved. The trouble is the monthly salary on autopay. There the index fund quietly wins.

So read the tracking difference, not the TER. One number folds in every cost and shows the real gap to the index. The sticker is the cost of the fund. The tracking difference is the cost of owning it.

Same index, two wrappers. Pick the one that fits how you actually invest, side by side here: