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When building a diversified investment portfolio in India, Exchange-Traded Funds (ETFs) and Mutual Funds are two popular options. While both allow you to invest in a basket of securities, they differ significantly in structure, costs, and how they’re traded. This guide explains the key differences to help you choose the right option

What Are Mutual Funds?

A mutual fund pools money from multiple investors and invests it across various securities—stocks, bonds, or both. Professional fund managers actively research companies, select securities, and adjust portfolios to meet the fund’s investment objective. When you invest in a mutual fund, your transaction is processed at the end-of-day Net Asset Value (NAV), which is calculated after market hours. You don’t need a demat account, and you can set up systematic investment plans (SIPs) with automated monthly debits from your bank account.

What Are Exchange-Traded Funds (ETFs)?

ETFs are investment funds that trade on stock exchanges like individual company shares. Most ETFs follow a passive investment approach, tracking a market index such as Nifty 50 or BSE Sensex. The ETF holds the same stocks in the same proportion as the index, aiming to replicate its performance. You need a demat and trading account to invest in ETFs. Unlike mutual funds, ETF prices fluctuate in real-time throughout trading hours, allowing you to buy or sell at any moment during market sessions. This provides intraday trading flexibility but also means you need to actively place buy/sell orders.

ETFs vs Mutual Funds: Complete Comparison

Feature	ETFs	Mutual Funds
Trading	Real-time on stock exchanges	Once daily at end-of-day NAV
Price Discovery	Market price (supply/demand)	NAV calculated after market close
Management Style	Mostly passive (index-tracking)	Active or passive
Expense Ratio	0.05-0.50% annually	0.50-2.50% annually
Minimum Investment	1 unit (~₹100-₹5,000)	SIP: ₹500+, Lumpsum: ₹5,000+
Demat Account	Required	Not required
SIP Automation	Manual (platform-dependent)	Built-in, automated
Brokerage Charges	Yes (₹10-20 per trade)	No
Exit Load	No, but brokerage applies	0-1% (if redeemed early)
Transparency	Real-time holdings visible	Monthly disclosure (1-month lag)
Liquidity	Depends on trading volume	High (direct redemption from AMC)
Fractional Units	No	Yes
Best For	Cost-conscious, passive investors	SIP investors, active strategies

Key Differences Explained

1. Trading and Liquidity

ETFs trade continuously during market hours (9:15 AM to 3:30 PM) at real-time market prices determined by supply and demand. You can buy during a market dip at 11 AM or sell during a rally at 2 PM. However, liquidity depends on trading volumes—low-volume ETFs may have wider bid-ask spreads, increasing your transaction costs.

Mutual Funds transact once daily at the NAV calculated after market closes. If you place a purchase order at 10 AM, you’ll get units at that day’s closing NAV (calculated around 9-10 PM). This means you don’t know the exact price when placing your order. Redemptions are processed within 1-3 business days directly with the AMC, ensuring liquidity regardless of market trading volumes.

2. Management Style

ETFs predominantly follow a passive approach, mechanically replicating an index. If Nifty 50 contains 50 stocks, the ETF holds the same 50 stocks in identical proportions. There’s minimal human intervention—no active buying/selling based on market views. This simplicity keeps costs low.

Mutual Funds can be actively managed (fund managers make active buy/sell decisions to beat the index) or passively managed (index funds that track indices like ETFs but are structured as mutual funds). Actively managed funds aim to outperform benchmarks through research, stock selection, and tactical allocation—though 70-80% underperform their benchmarks over 10+ years.

3. Understanding Tracking Error (ETFs)

While ETFs aim to replicate index returns, they don’t achieve perfect replication due to:

– Expense ratios deducted from returns

– Rebalancing costs when index composition changes

– Cash drag from dividend holdings

– Transaction costs

Example:

– Nifty 50 Index returns: 15% annually

– Nifty 50 ETF returns: 14.80% annually

– Tracking error: 0.20%

Look for ETFs with tracking errors below 0.25% for efficient index replication. Lower tracking error indicates better fund management quality.

4. NAV vs Market Price (ETFs)

Net Asset Value (NAV): The actual value of the ETF’s underlying holdings divided by total units. Calculated based on closing prices of all securities in the portfolio.

Market Price: The price at which the ETF trades on the exchange, determined by buyer-seller demand.

Example:

– ETF NAV at 3:30 PM: ₹100.00

– ETF market price: ₹100.40 (trading at 0.4% premium)

– OR: ₹99.80 (trading at 0.2% discount)

Why they differ: Supply-demand imbalances, liquidity constraints, or market timing differences. High-volume ETFs typically trade very close to NAV (within 0.1-0.3%), while low-volume ETFs may have wider gaps.

5. True Cost Comparison

Beyond expense ratios, consider the total cost of ownership:

ETF Real Costs (₹1 lakh invested for 5 years):

– Expense ratio: 0.15% annually = ₹750 total

– Brokerage (buy + sell): ₹40

– Securities Transaction Tax (STT): ~₹100

– Impact cost (bid-ask spread): ₹50

– Total cost: ~₹940

Mutual Fund Direct Plan (₹1 lakh for 5 years):

– Expense ratio: 1% annually = ₹5,000 total

– No brokerage/STT

– Exit load: ₹0 (if held >1 year)

– Total cost: ~₹5,000

Mutual Fund Regular Plan (₹1 lakh for 5 years):

– Expense ratio: 2% annually = ₹10,000 total

– Total cost: ~₹10,000

Cost savings: ETF saves ₹4,060 vs. direct mutual fund, ₹9,060 vs. regular mutual fund over 5 years. Over 20 years with compounding, this difference becomes ₹50,000-₹1,00,000+ on a ₹1 lakh investment.

Tax Treatment (FY 2024-25)

Equity ETFs and Equity Mutual Funds

Tax treatment is identical:

Long-Term Capital Gains (holding >12 months):

– Tax rate: 12.5%

– Annual exemption: ₹1.25 lakh (cumulative across all equity investments)

Short-Term Capital Gains (holding ≤12 months):

– Tax rate: 20%

Debt ETFs and Debt Mutual Funds

For investments made on/after April 1, 2023:

– All gains taxed at your income tax slab rate (any holding period)

– No LTCG benefit

For investments made before April 1, 2023:

– Complex grandfathering rules apply based on sale date

– See our detailed LTCG tax article for specifics

Key Point: Tax treatment is identical between ETFs and mutual funds within the same category (equity/debt).

Which Should You Choose?

Choose ETFs if you:

– Prefer low-cost, passive investing focused on index returns

– Have a lumpsum amount to invest (not regular monthly investments)

– Want real-time trading flexibility during market hours

– Are comfortable managing your own portfolio actively

– Already have a demat account or don’t mind opening one

– Believe in buy-and-hold with minimal transactions

– Want complete transparency of holdings

Choose Mutual Funds if you:

– Value professional fund management and research

– Invest through monthly SIPs (₹5,000-₹20,000)

– Seek diversification across multiple asset classes

– Want automated investment without manual intervention

– Prefer not to maintain a demat account

– Need systematic withdrawal plans (SWP) for regular income

– Want access to actively managed strategies in less efficient market segments

Alternate to Manual investing in Mutual Funds:

Companies like Curie Money enable the investors to seamlessly invest in mutual funds without taking any effort. All that the investor needs to do is park their money (as they do in their bank account) in Curie Money. And Curie Money will invest on the investor’s behalf in liquid mutual funds. The silver lining is that the funds are always readily available, i.e. as and when you make a debit, your equivalent investment is liquidated instantaneously! This is highly convenient for individuals who wish to enjoy returns in every penny that too without the hassle of researxhing good mutual funds!

Practical Considerations

ETF Challenges:

– Requires monitoring bid-ask spreads before trading

– Low-volume ETFs may have poor liquidity

– Manual SIP setup (not auto-debit)

– Demat account annual maintenance (₹300-500)

– Brokerage costs on each transaction

– Need to place orders during market hours

Mutual Fund Advantages:

– Seamless SIP automation with bank mandate

– Can invest exact amounts (e.g., ₹7,543)

– Fractional units allowed

– Direct redemption with AMC (no market dependency)

– Free portfolio rebalancing (switches between schemes)

– Systematic Transfer Plans (STP) and Withdrawal Plans (SWP)

Combining Both Strategically

Many sophisticated investors use both:

Core holdings: ETFs for large-cap exposure (60-70% of equity)

Satellite positions: Active mutual funds for mid/small-cap opportunities (20-30%)

Debt allocation: Mutual funds for ease of SWP in retirement

This approach maximizes cost efficiency while retaining flexibility where active management can add value.

Another approach is to park your funds with Curie money, and enjoy mutual fund investment without taking any effort of selection and investment. As and when you need your funds, equivalent investment is liquidated!

Important Considerations

Both ETFs and mutual funds carry market risks. Equity investments can be volatile in the short term. Past performance doesn’t guarantee future results. Assess your financial goals, risk tolerance, investment horizon, and comfort with different investment mechanisms before choosing. Neither option is inherently superior—the right choice depends on your specific situation, investment behavior, and preferences.

Conclusion

ETFs offer ultra-low costs, transparency, and real-time trading flexibility, making them ideal for cost-conscious passive investors with lumpsum investments. Mutual funds provide professional management, seamless SIP automation, and convenience without needing a demat account, suiting systematic investors and those seeking active strategies.

The best approach for many investors is using both strategically—ETFs for core index exposure and mutual funds where active management or systematic investing adds value. Focus on your investment goals and behavior patterns rather than searching for a universally better option.

Curie Money (AMFI ARN: 257706) partners with ICICI Prudential and Bajaj Finserv to offer access to quality mutual funds investment options. Choose based on your needs, or strategically combine both.

Disclaimers:

Mutual fund and ETF investments are subject to market risks. Read all scheme-related documents carefully before investing. Past performance is not indicative of future results. This information is for educational purposes only, not investment advice. Consider your financial goals and risk tolerance before making investment decisions.