Mutual Funds vs ETFs : Which one to go with?

August 3, 2025

Investing in capital markets has never been more accessible in India. Two of the most popular pooled investment vehicles are Mutual Funds and Exchange-Traded Funds (ETFs). Both offers diversification and professional oversight but differ in structure, costs, liquidity, and tax treatment. In this post, we’ll cover:

What Mutual Funds and ETFs
Key differences and similarities
Advantages and disadvantages of each
Do’s and don’ts when investing

What Are Mutual Funds?

A Mutual Fund is a professionally managed investment scheme that pools money from multiple investors to purchase a diversified portfolio of securities (equities, debt, money market instruments).

Key Features

Active & Passive Management: Can be actively managed (fund manager picks securities) or passively track an index (index funds).
Pricing: Units price (NAV) is calculated once daily after market close.
Liquidity: Open-ended funds allow purchases/redemptions at NAV on any business day.
Minimum Investment: Starts as low as ₹100–₹500 via SIP or lump sum.

What Are ETFs?

An Exchange-Traded Fund (ETF) is similar to an index mutual fund but trades on the stock exchange like a share.

Key Features

Passive Structure: Most ETFs track an index (Nifty 50, bank indices, commodities).
Real-Time Pricing: ETF units trade throughout the trading day at market-driven prices.
Lower Expense Ratios: Passive management and reduced overhead often make ETFs cheaper than active MFs.
Liquidity: Bought/sold instantly via your brokerage account, with bid–ask spreads.

🔍 Key Differences at a Glance

Criteria	Mutual Funds	ETFs
Management Style	Active & passive options	Predominantly passive
Pricing	NAV calculated once daily	Real-time market price
Expense Ratio	0.5% – 2.5% (active), 0.05% – 0.3% (index MFs)	0.05% – 0.5%
Minimum Investment	₹100–₹500 (SIP/lump sum)	1 unit (varies; ~₹200–₹3,000)
Liquidity	Same-day NAV on business days	Instantaneous during market hours
Tax Treatment	Long-term equity: 10% above ₹1L; debt: slab rates	Same as underlying category; STT applies
Availability	Direct via AMC or platforms; no brokerage needed	Through stock exchanges; brokerage charges

✅ Advantages and ❌ Disadvantages

Mutual Funds

✅ Advantages

Variety of active strategies to potentially beat the market
Systematic Investment Plans (SIP) encourage disciplined investing
No brokerage fees on direct plans
Broad choice of schemes (equity, debt, hybrid, thematic)

❌ Disadvantages

Higher expense ratios for active funds
NAV-based pricing can lead to timing risk
Redemption processing time (T+1/T+2 days)

ETFs

✅ Advantages

Ultra-low expense ratios for index-based ETFs
Trade like stocks: intraday buying/selling, limit orders
Transparency: daily portfolio disclosures
Potential tax efficiency in creation/redemption process

❌ Disadvantages

Brokerage and bid–ask spread costs
Limited active management options
May trade at a small premium or discount to NAV

✅ Do’s and ❌ Don’ts

✅ DO:

Compare expense ratios and brokerage costs side by side
Use SIPs for disciplined mutual fund investing
Check tracking error for ETFs (lower is better)
Rebalance your holdings periodically

❌ DON’T:

Chase performance blindly—look at long-term track records
Ignore liquidity—some ETFs have low daily volumes
Forget to account for bid–ask spreads when trading ETFs
Redeem MFs impulsively—consider exit loads and tax impacts

🎯 Conclusion

Both Mutual Funds and ETFs bring the power of diversification and professional management to Indian investors. Your choice hinges on cost considerations, trading preferences, and investment horizon. By weighing expense ratios, liquidity, and your personal goals, you can construct a balanced portfolio that leverages the best of both worlds.

Ready to get started? Review your risk profile, explore direct-plan MFs and index ETFs, and begin your journey toward smarter investing!

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