Index Funds or ETFs: Where should you put the money?

Index Funds are passive investment strategies which replicate an index and strive to generate returns similar to the index. Towards this end, they hold the constituents of the index in weights that closely match the actual index weighting. The goal is to minimize the tracking error (difference between the portfolio returns and the benchmark index) with lower administrative costs. 

The fund manager does not rebalance the portfolio based on his views of the market or sector and makes adjustments to keep the fund in line with its index. 

An Exchange Traded Fund (ETF) is a marketable security that tracks an index, a commodity (eg. Gold ETF) sector (eg bank, healthcare etc) or even another fund. The points of difference are in the ease of trading and tax efficiency. 

ETF trades like common equity shares on a stock exchange, i.e they can be bought and sold throughout the trading day and change hands like shares. Unlike ETFs, Index Funds must trade once a day after the market close. 

ETFs handle shareholder redemption more efficiently (cheaply) than open-ended funds through in-kind delivery of stocks. This reduces the taxable gains and losses that would otherwise be passed on to shareholders. 

That said, ETFs involve higher transaction costs i.e. the commission charged by the broker and the second cost involved is the bid-ask spread. 

ETFs are more likely to have lower tracking errors since unlike Index Funds there is no requirement to hold some cash to honour redemption requests. 

Both Index Funds and ETFs have performed well historically. Before deciding where to invest your money, it could be a good idea to compare and analyse the overall prices of each.