Key Differences Between ETFs and Mutual Funds: Every Investor Should Know

Often, it has been observed that people, mainly the new investors, get confused between ETFs and mutual funds. If this is happening to you, do not worry, you are not alone who is confused about the difference between ETF and mutual fund. This is because both ETFs and mutual funds are quite similar at the top. They both have similar structure, management styles, and exposure to different asset classes. However, when you dig a little deeper, you can find out that there are significant differences between the two. If you want to invest in any of these two, or both, it is important to understand the story behind ETFs vs mutual funds. 

What is ETF?

ETFs, which stand for or etf full form is Exchange Traded Funds, can be defined as a combination of mutual funds and stocks. It combines the features of both worlds. These funds are designed for tracking any particular sector, indices, commodities, or other assets’ performance. So, when an investor invests in an ETF fund, he or she gets exposure to the entire segment via a single transaction, which helps the investor diversify well.

What sets ETFs apart is that these funds are traded like any other stock on the stock exchanges, and this is why the very name has been given to these funds. 

The price of the ETFs is determined just like the price of any stock, where the intersection point of demand and supply is considered to be the asset’s price. This is why the price of the ETF often varies from the NAV of the ETF. 

As ETFs are designed to replicate the underlying asset segment, thus, these are passively managed funds, and thus, the expense ratios of these funds are comparatively lower than actively managed funds. 

ETFs can thus be traded like stocks, as well as invested in for the long term for capital appreciation. 

What are Mutual Funds?

Coming to the mutual funds, these are professionally managed, which pool money from different investors and invest in a portfolio of asset/s, which can include stocks and debt instruments. 

The mutual funds are designed to beat the market returns and to achieve specific investment goals. While the equity mutual funds are mostly for capital accumulation, or wealth creation, the debt mutual funds have investment goals of income generation for the investors, and the hybrid ones try to strike a balance between the two. 

In case of mutual funds, the NAV is determined at the end of the daily trading session for open-ended funds, and for closed-ended ended, it varies from weekly NAV determination to monthly. 

Now, mutual funds can be actively managed or passively managed as well. The actively managed mutual funds try to beat the market returns, while passively managed ones try to replicate indices, and are thus known as index funds. 

What are the differences between ETFs and Mutual funds?

Now, let’s try to understand how mutual funds are different from ETFs – 

ETFs Vs Mutual Funds

Basis	ETFs	Mutual Funds
Trading	ETFs are traded on a stock exchange like stocks	Mutual funds are not traded on any stock exchanges
Liquidity	More liquid as the ETFs are traded throughout the day	Less liquid compared to ETFs
Management	Passively Managed	Actively Managed
Pricing	ETFs are purchased and sold at the market price	Mutual funds are bought and sold at NAV
Expenses	Lower expenses, but STT is levied on certain ETFs apart from gold ETFs, gilt ETFs	Higher expenses owing actively managed status
Minimum Investments	There are no minimum investment requirements for ETFs, as they are traded like stocks on the exchanges.	There are certain minimum investment criteria for mutual funds that depend on the type of fund, fund houses, and route of investment. For SIP, it is mostly ₹500, and for a lump sum, it is around ₹1000 or ₹5000.
Taxation	More tax-efficient as short-term capital gains are taxed at tax slab, and long-term capital gains are tax-free	Less tax-efficient compared to ETFs, especially the equity-oriented mutual funds, as short-term capital gains are taxed at 15% or 20% and long-term gains are taxed at 10% or 12.5%
Investment platform	Required a Demat account and a trading account	You can invest via fintech apps and AMC websites

ETF vs. Mutual Funds: Which one is Better For you?

So, now that you have an idea how both ETFs and mutual funds are different, you must be thinking etf vs mutual fund which is better for you, isn’t it?

So, here are the factors you should consider while choosing between an ETF and vs mutual fund. 

Choose ETFs if –

• You have experience in the stock market, and you have traded in stocks
• You prefer more control over the prices of your investments
• You are looking for cost-efficient investment options 
• You daily track the market and love transparency, real-time price changes, and flexibility

Choose Mutual Funds if – 

• You are new to markets, with no or little experience in trading
• You want to build a discipline for investments via SIPs
• Your investment goal is long-term capital accumulation
• You are looking for market-beating returns
• You are trying to invest in less efficient markets, such as high-yield bonds and emerging markets, where you need active guidance from professionals

Final Thoughts 

So, both ETFs and mutual funds are important investment vehicles, serving different goals and preferences of investors. To understand which you should invest in, it is important to understand the differences between ETFs and mutual funds. While ETFs are more for those who are already aware of the markets and looking for cost-efficient investment options, mutual funds, on the other hand, are more suitable for people looking to build wealth over time. Thus, choosing between the two solely depends on your investment goals.  

ETFs and Mutual Funds | FAQs

Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.