Side by side
| ETF | Mutual fund | |
|---|---|---|
| Where you buy | On the stock exchange, through a broker | From the fund house, directly or through an app |
| Price you get | The market price at that moment | The day's NAV, set after the market closes |
| Demat account | Needed | Not needed |
| Yearly cost | Usually the lowest | Low for index funds, higher for active funds |
| Cost of each trade | Brokerage and a bid-ask spread | None, though some funds charge an exit load |
| Monthly SIP | Only where a broker offers it | Built in |
| Smallest amount | The price of one unit | Often ₹100 to ₹500 |
| What it holds | Almost always an index | An index, or whatever the manager chooses |
| Tax | Same as a fund of the same type | Same as an ETF of the same type |
What each one is
A mutual fund collects money from many investors and invests it in shares, bonds or both. You buy units from the fund house and sell them back to it. Every order placed in a day gets the same price, the net asset value, worked out after the market closes.
An exchange traded fund does the same pooling, but its units are listed on the stock exchange. You buy them from other investors through a broker, at whatever price they are trading at that moment. Nearly every ETF in India tracks an index, such as the Nifty 50, or a commodity, such as gold.
Cost: the yearly fee is not the whole bill
ETFs usually have the lowest expense ratios of any fund. A Nifty 50 ETF can cost less than a tenth of a percent a year. The index fund that tracks the same index, in its direct plan, typically costs a little more. Actively managed funds cost several times as much.
An ETF has costs the expense ratio does not show:
- Brokerage and exchange charges on every purchase and sale.
- The spread between the buying and selling price. On a heavily traded ETF it is tiny. On a thinly traded one it can cost more than a year of fees.
- A gap to NAV. The market price can sit above or below what the units are really worth, most often on small ETFs and on volatile days.
For a large one-time purchase in a liquid ETF, these are small. For a monthly SIP of a few thousand rupees, they can cancel the saving in fees.
Convenience
A mutual fund SIP runs by itself: a fixed amount leaves your bank on a set date and buys units at that day's NAV, down to fractions of a unit. An ETF has to be bought in whole units through a trading account, and the order needs a price.
The ETF's advantage is control. You can buy or sell at any moment during market hours, which matters if you trade often. For long-term investing it matters very little.
Tax
There is no tax reason to choose one over the other. An equity ETF and an equity fund are taxed the same way: 12.5% on long-term gains above ₹1.25 lakh a year once held for 12 months, and 20% on gains before that. Our capital gains tax calculator works for both.
Which suits whom
- Investing a fixed amount every month: a mutual fund, usually an index fund if you want what an ETF offers. See ETF vs index fund.
- Investing a large amount at once, with a demat account already: a liquid ETF on a broad index is a sound, low-cost choice.
- Wanting a manager to pick shares: only a mutual fund does that. See index fund vs actively managed fund.
- Gold: a gold ETF or a gold fund that invests in one. The same trade-offs apply.
Whichever you choose, what you hold matters more than the wrapper. The portfolio check shows how your funds fit together, and an advisor can help decide the mix. Talk to an advisor.