Mutual funds and exchange-traded funds (ETFs) are both ways to own a basket of shares, bonds or gold without picking each one yourself. In India both are run by asset management companies (AMCs) and regulated by SEBI, the market regulator. The difference is mainly in how you buy and sell them, and that difference changes your costs, your price and your convenience. This guide compares them side by side.
The basic idea: a pooled portfolio
A fund collects money from thousands of investors and invests it according to a stated plan, for example "track the NIFTY 50 index" or "buy large Indian companies". Each investor owns units of the fund. The value of one unit is the NAV (net asset value): the total value of everything the fund holds, minus its costs, divided by the number of units.
NAV = (value of holdings + cash − liabilities) ÷ units outstanding
Both mutual funds and ETFs have a NAV. What differs is whether you trade at the NAV or at a market price.
Both also come in many flavours. There are equity funds and ETFs that track indices such as the NIFTY 50, NIFTY Next 50 or bank and IT sector indices; debt funds and bond ETFs; gold and silver funds; and funds that invest abroad. A fund of funds (FoF) is a mutual fund that invests in other funds, often in an ETF, so that people without a demat account can still own what the ETF holds. That convenience usually costs a little more, because you pay the expenses of both the FoF and the ETF underneath it.
How you buy a mutual fund
You buy and sell mutual fund units directly with the fund house (or through a platform or distributor). Every order placed before the daily cut-off time gets that day's NAV, worked out after the market closes. Whether you put in ₹500 or ₹50 lakh, you get the same price as everyone else that day. When you sell (redeem), the fund pays you from its own cash or sells holdings. You do not need a demat account, and you can set up an automatic SIP for any amount above the fund's minimum.
How you buy an ETF
An ETF is listed on NSE and BSE like a share. You buy it from another investor through your broker, during market hours, at whatever price the market quotes at that moment. You need a demat and trading account, and you buy whole units. The ETF's market price normally stays close to its NAV because large dealers, called market makers, buy and sell to keep it in line (the ETF price vs NAV guide explains how). You can see listed ETFs and their prices on the ETFs page.
Side-by-side comparison
| Feature | Mutual fund | ETF |
|---|---|---|
| Where you buy | From the fund house | On the stock exchange |
| Price | One NAV per day | Live market price, changes every second |
| Account needed | No demat needed | Demat and trading account |
| Running cost | Expense ratio, higher for regular plans | Usually a low expense ratio |
| Trading costs | Usually none to buy; possible exit load | Brokerage, bid-ask spread, exchange charges |
| SIP | Easy, automatic, any amount above the minimum | Possible through some brokers, in whole units |
| Liquidity | Fund pays you on redemption | Depends on buyers and market makers on the exchange |
| Active or passive | Both kinds | Mostly passive (track an index or gold) |
A worked example of costs
Suppose you invest ₹5,00,000 to track the NIFTY 50 for ten years. You compare an index mutual fund (direct plan) with an expense ratio of 0.20% a year and a NIFTY ETF at 0.05% a year. Assume the index returns 11% a year before costs.
- Index fund: grows at about 10.80% a year, to roughly ₹13.9 lakh.
- ETF: grows at about 10.95% a year, to roughly ₹14.1 lakh, before brokerage and the spread on buying and selling.
The gap is about ₹19,000 over ten years, less after the ETF's trading costs. For a lump sum held a long time, the ETF's lower running cost usually wins. For small monthly investments, the index fund's convenience and zero brokerage can matter more. The expense ratio guide shows how these small percentages compound. These numbers are illustrations, not expected returns.
Liquidity and tracking
A mutual fund always buys back your units at NAV (subject to any exit load). An ETF can only be sold if someone buys it on the exchange. Large ETFs on the NIFTY 50 or gold trade heavily and have tight spreads. Small or new ETFs may trade only a few units a day, with a wide gap between the buy and sell price, and their market price can drift away from NAV for a while. Before buying an ETF, check its daily traded volume and the bid-ask spread in the order book.
Both kinds of index-tracking fund have a tracking error: the difference between the fund's return and the index's return. It comes from costs, cash held for redemptions and the timing of trades. Lower is better.
A live view of fund money
Mutual funds are a large part of the domestic institutional investors (DIIs) whose buying and selling NSE reports each evening. Here are the latest flows:
Look at the DII column: on many days when foreign investors (FIIs) sell, DIIs buy, partly because steady monthly SIP money keeps flowing into mutual funds. The FII and DII page shows the longer history.
Which one suits whom
- Mutual funds suit people who want automatic monthly investing, no demat account, fractional units and no need to watch prices.
- ETFs suit people who already have a demat account, invest larger lump sums, want the lowest running cost, or want to buy and sell during market hours at a known price.
- Many investors use both: an index mutual fund for a monthly SIP and ETFs for lump sums or for gold.
Tax rules for equity, debt and gold funds have changed several times in recent years and can differ between ETFs and mutual funds depending on what they hold. Check the current rules with a tax adviser or the fund's documents.
Common mistakes
- Buying an illiquid ETF with a market order. You may pay well above NAV. Use a limit order near the indicative NAV.
- Comparing only expense ratios. For ETFs, brokerage and spreads are part of the cost too.
- Thinking ETFs are always passive and mutual funds always active. Both kinds exist on both sides.
- Trading ETFs too often. The low cost of holding is lost if you keep buying and selling, and each trade pays brokerage and the spread again.