What is the main difference between Mutual Funds and ETFs?

The main difference is that mutual funds are bought and sold through Asset Management Companies (AMCs) at the end-of-day NAV, while ETFs trade on stock exchanges like shares, with prices fluctuating throughout the day.

Are ETFs better than Mutual Funds?

ETFs generally have lower expense ratios, intraday liquidity, and transparency. However, mutual funds offer SIP options, professional management, and may be easier for long-term investors who don’t want to trade actively.

Which is more cost-effective: ETFs or Mutual Funds?

ETFs usually have lower expense ratios and no exit loads, making them more cost-effective. Mutual funds may have higher costs but provide systematic investment plans (SIPs) and active management options.

Can beginners invest in ETFs?

Yes, beginners can invest in ETFs if they have a demat and trading account. However, mutual funds may be more beginner-friendly as they don’t require direct trading and allow SIP investments.

Which is better for long-term investing: Mutual Funds or ETFs?

Both can be good for long-term investing. Mutual funds offer SIPs and professional fund management, while ETFs provide diversification at low cost. The better choice depends on the investor’s goals, risk appetite, and trading comfort.

Mutual Funds Vs ETF: Differences and Which Is Better

AssetPlus
Sep 5
5 min read

The choice between mutual funds and Exchange-Traded Funds (ETFs) represents one of the most important decisions facing Indian investors today. With India's ETF market surging to ₹8.5 lakh crore in AUM as of May 2025 and mutual funds managing ₹75.36 lakh crore, understanding the key differences between these investment vehicles is crucial for making informed decisions that align with your financial goals.

Mutual Funds Vs ETF: Differences and Which Is Better

Understanding the Fundamentals

What Are Mutual Funds?

Mutual funds are investment vehicles that pool money from multiple investors to create a diversified portfolio of stocks, bonds, or other securities. In India, mutual funds are typically actively managed by professional fund managers who make strategic decisions to potentially outperform market benchmarks. The fund manager analyzes market conditions, selects securities, and adjusts the portfolio based on their expertise and market outlook.

What Are ETFs?

Exchange-Traded Funds (ETFs) are investment funds that trade on stock exchanges like individual stocks but track specific indices such as the Nifty 50 or Sensex. ETFs are primarily passively managed, meaning they mirror a particular index and aim to replicate its performance rather than beat it. This passive approach results in lower management complexity and operational costs.

Key Differences Between Mutual Funds and ETFs

Trading and Liquidity

The most fundamental difference lies in how these instruments are traded:

Mutual Funds: Transactions occur once daily at the Net Asset Value (NAV) calculated after market closure. Regardless of when you place your order during the day, you receive the same end-of-day price. This forward-pricing mechanism means you cannot time your entry or exit during market hours.

ETFs: Trade continuously throughout market hours like individual stocks, allowing real-time buying and selling at current market prices. This provides greater flexibility and control over pricing, particularly valuable during volatile market conditions.

Cost Structure and Expense Ratios

Cost efficiency represents a significant differentiator:

ETFs: Generally maintain lower expense ratios, with Indian ETFs having expense ratios as low as 0.35%. The passive management approach reduces operational costs, and ETFs don't charge front-end or back-end load fees.

Mutual Funds: Active mutual funds can have expense ratios up to 2%, reflecting the costs of professional research, analysis, and active portfolio management. However, this includes comprehensive fund management services and potential for market outperformance.

Investment Minimums and Accessibility

ETFs: Offer no minimum investment beyond the price of one unit. If an ETF unit costs ₹100, you can invest in whole multiples, making them accessible to investors with smaller capital.

Mutual Funds: Typically require minimum investments ranging from ₹500 to ₹5,000 for initial investments. However, SIP options allow investments as low as ₹100-₹500 monthly, making systematic investing more accessible.

Systematic Investment Plans (SIP)

Mutual Funds: Provide comprehensive SIP facilities with automatic monthly investments, enabling disciplined wealth building through rupee-cost averaging.

ETFs: Generally do not offer SIP facilities, though some brokers may provide SIP-like services. Each investment requires deliberate action, which can be cumbersome for regular investors.

Account Requirements

Mutual Funds: Can be purchased directly from fund houses or through intermediaries without requiring a demat account. This simplicity makes them more accessible to traditional investors.

ETFs: Require demat and trading accounts for investment, adding complexity for investors unfamiliar with stock market operations.

Tax Implications in India

Both investment types follow similar tax structures under Indian regulations:

Equity-Oriented Funds (Equity Mutual Funds and Equity ETFs)

Short-Term Capital Gains (STCG): 20% tax for holdings less than 12 months

Long-Term Capital Gains (LTCG): 12.5% tax on gains exceeding ₹1.25 lakh annually for holdings over 12 months.

Debt and Gold ETFs

Tax Treatment: Similar to debt mutual funds, with gains taxed as per income tax slab rates regardless of holding period for units purchased after April 1, 2023.

Tax Efficiency Advantage

ETFs are generally more tax-efficient due to their structure. The in-kind creation and redemption process minimizes capital gains distributions to shareholders. Mutual funds may generate taxable events when managers buy or sell securities to accommodate redemptions, passing capital gains to all shareholders.

Investment Management Styles

Active vs Passive Management

Mutual Funds: Predominantly actively managed, with fund managers attempting to outperform benchmarks through strategic stock selection and market timing. This professional management aims to generate alpha (excess returns) but comes with higher costs and no performance guarantee.

ETFs: Primarily passively managed, tracking specific indices without attempting to outperform them. This approach ensures market-matching returns with lower costs and reduced manager risk.

Performance Considerations

Research shows mixed results for active vs passive performance. While 51% of active strategies survived and beat passive funds in certain categories, the success varies significantly across market conditions and time periods. Index ETFs historically deliver 0.56% median expense ratios versus 0.90% for mutual funds, providing a cost advantage that compounds over time.

Liquidity and Market Dynamics

ETF Liquidity Challenges in India

Despite global ETF growth, Indian ETFs face liquidity constraints. Low trading volumes and wide bid-ask spreads can increase transaction costs. Many Indian ETFs have daily turnover under ₹10 crore, potentially affecting large transactions.

Mutual Fund Liquidity

Mutual funds offer consistent liquidity through the fund company, ensuring you can redeem at NAV without market dynamics affecting your transaction price.

Market Growth and Adoption

Global Trends

ETF assets globally have surged from ₹167.8 lakh crore in 2015 to ₹839 lakh crore by 2025, demonstrating strong investor preference for low-cost, transparent investment options.

Indian Market Dynamics

India's ETF AUM has grown 5x over five years, reaching ₹8.5 lakh crore by May 2025. However, ETFs represent only 13% of total mutual fund AUM, indicating significant growth potential.

Trading volumes have increased dramatically, from ₹51,101 crore in FY 19-20 to ₹3.83 lakh crore in FY 2024-25, showing improving market acceptance and infrastructure.

Which Is Better: The Verdict

The choice between mutual funds and ETFs depends on your investment objectives, experience level, and preferences:

Choose Mutual Funds If:

You prefer systematic investing through SIPs.
You want professional active management attempting to beat market returns.
You're a beginner investor seeking simplicity.
You don't want to maintain a demat account.
You value comprehensive fund management services.

Choose ETFs If:

You're cost-conscious and prefer lower expense ratios.
You want real-time trading flexibility.
You're comfortable with stock market operations.
You prefer passive index investing.
You have experience with demat accounts.

Hybrid Approach

Many successful investors use both instruments strategically. A core portfolio of low-cost ETFs for broad market exposure, combined with selective active mutual funds in specific sectors or themes, can provide optimal diversification and cost efficiency.

Research suggests that portfolios combining 40% passive exposure with active funds can replicate all-active portfolio returns while achieving better risk-adjusted performance.

Frequently Asked Questions

What are the main cost differences between mutual funds and ETFs in India?

ETFs typically have lower expense ratios, with Indian ETFs charging as low as 0.35% compared to active mutual funds that can charge up to 2%. However, ETFs require demat account charges and brokerage fees, while mutual funds don't have these trading costs.

Can I invest in ETFs through SIP like mutual funds?

Generally, ETFs don't offer direct SIP facilities. While some brokers may provide SIP-like services, each ETF investment typically requires deliberate action. Mutual funds offer comprehensive SIP options starting from as low as ₹100-₹500 monthly.

How does taxation differ between mutual funds and ETFs in India?

Both follow similar tax structures: 20% STCG tax for holdings under 12 months and 12.5% LTCG tax on gains above ₹1.25 lakh for holdings over 12 months. However, ETFs are generally more tax-efficient due to their structure, which minimizes capital gains distributions.

Which is better for beginners - mutual funds or ETFs?

Mutual funds are generally better for beginners due to their simplicity, SIP facilities, no demat account requirement, and professional management. ETFs are more suitable for investors comfortable with stock market operations and seeking lower costs.

Why are ETFs less popular in India compared to mutual funds?

ETFs in India face challenges including low liquidity, tracking errors, requirement for demat accounts, lack of SIP facilities, and higher transaction costs through brokerage fees. Additionally, the mutual fund industry's strong SIP culture and distributor network have made mutual funds more accessible to retail investors.