What is the Difference Between ETF and Mutual Fund?

Many investors often search for mutual funds vs ETFs to understand which is a better investment option. While both let you invest in diversified assets like stocks and bonds, they work quite differently. Mutual funds are professionally managed, while ETFs (Exchange-Traded Funds) usually follow a specific market index. 

Understanding the mutual fund vs ETF difference is crucial because your choice can impact your returns, liquidity and tax efficiency. So, before you decide where to put your money, let’s break down both investment types in simple terms. 

Understand Mutual Funds 

A mutual fund pools money from multiple investors and invests it in a mix of securities such as stocks, bonds or other assets. These funds are managed by professional fund managers who make buy or sell decisions to maximise returns. 

The value of your investment depends on the Net Asset Value (NAV), which represents the per-unit price of the fund after expenses are deducted. 

A key point in the mutual funds vs ETFs debate is active management. Many mutual funds are actively managed, meaning a fund manager tries to outperform the market through research, analysis, and tactical decisions. This can potentially bring higher returns but also comes with higher expense ratios compared to ETFs. 

Mutual funds are ideal for investors who prefer professional management and are okay with slightly higher costs for expert handling of their investments. 

Know About ETFs 

An Exchange-Traded Fund (ETF) is also a type of mutual fund, but it works differently. Instead of being actively managed, most ETFs are passively managed and aim to replicate the performance of a particular index, like the Nifty 50 or Sensex. 

This means ETFs simply try to match the benchmark’s returns rather than outperform it. Investors can buy and sell ETFs on stock exchanges throughout the day, just like stocks. 

However, ETFs may experience a tracking error, which occurs when the ETF’s performance slightly deviates from its benchmark index. Despite this, ETFs generally offer lower expense ratios and are considered more tax-efficient because they generate fewer capital gains distributions compared to mutual funds. 

In short, ETFs provide flexibility, liquidity and cost efficiency, making them a popular choice for investors who prefer a hands-off approach to investing. 

Difference Between Mutual Funds Vs ETFs 

When understanding the mutual fund vs ETF difference, it helps to look at how they differ on key parameters: 

Factor	Mutual Funds	ETFs
Management Style	Actively or passively managed by professionals	Mostly passively managed to track an index
Trading Method	Bought or sold at the end of the trading day based on NAV	Traded on stock exchanges like shares throughout the day
Expense Ratio	Generally higher due to fund management costs	Lower as ETFs have minimal management intervention
Liquidity	Less liquid; redemptions take a few days	Highly liquid; can be traded anytime during market hours
Tax Efficiency	Less tax-efficient due to capital gains from active management	More tax-efficient due to fewer capital gains distributions
Tracking Error	Not applicable to actively managed funds	May have slight tracking error compared to the benchmark

This table summarises the major mutual fund vs ETF difference you should know before investing. 

Types of Mutual Funds and ETFs 

Just like mutual funds come in different types, ETFs also have various categories. Here are some popular ones to help you choose: 

Types of Mutual Funds 

• Equity Mutual Funds: Invest mainly in stocks for long-term growth 

• Debt Mutual Funds: Focus on fixed-income securities like bonds for stability 

• Hybrid Funds: Combine both equity and debt for balanced risk and reward 

• Index Funds: Passively track a specific market index, similar to ETFs 

Types of ETFs 

• Equity ETFs: Track a stock index like Nifty 50 or Sensex 

• Debt ETFs: Invest in government or corporate bonds 

• Commodity ETFs: Invest in commodities like gold or silver 

• International ETFs: Provide exposure to global markets 

Understanding these types helps you diversify your portfolio across risk levels and asset classes. 

Mutual Fund Vs ETF Redemption Example 

Let’s understand the mutual fund vs ETF difference with an example. 

Scenario: 

 You’ve invested ₹1 lakh in both a mutual fund and an ETF. 

• Mutual Fund Redemption: You can redeem your units anytime, but the transaction is processed at the end of the trading day based on the day’s NAV. The amount reflects in your bank account within a few business days. 

• ETF Redemption: You can sell your ETF units instantly on the stock exchange during trading hours and get the amount based on the market price at that moment. 

So, if you value quick access to your money, ETFs offer more liquidity. 

Are ETFs Riskier Than Mutual Funds? 

When comparing mutual funds vs ETFs, risk depends on what you invest in. ETFs and mutual funds that track the same index carry almost identical market risks. However, ETFs may carry slightly higher short-term risk due to daily price fluctuations since they’re traded throughout the day. 

On the other hand, actively managed mutual funds can sometimes outperform during market volatility because fund managers make strategic decisions. 

So, ETFs are not necessarily riskier — they just behave differently. The key is to align your investment choice with your goals, timeline and risk tolerance. 

Which is Better: ETF or Mutual Fund? 

Choosing between a mutual fund and an ETF depends on your personal financial goals. If you prefer active management and long-term wealth creation, mutual funds are a great fit. But if you value liquidity, lower costs and tax efficiency, ETFs may be better. 

You can even invest in both, using ETFs for flexibility and mutual funds for disciplined growth. 

However, if you ever need quick access to cash without redeeming your investments, you can opt for a Fibe Loan Against Mutual Funds. Get a loan starting from ₹15,000 up to ₹10 lakhs by using your mutual fund as collateral and continue growing your investments uninterrupted. Simply download the Fibe App and apply within minutes. 

Final Thoughts 

Both ETFs and mutual funds are strong investment vehicles for wealth creation. The mutual funds vs ETFs debate isn’t about which is ‘better’ universally, but which one fits your financial goals best. 

If you’re just starting, you can explore both to enjoy diversification, liquidity and steady growth. 

FAQs on Mutual Funds Vs ETFs 

1. Can I invest in both ETFs and mutual funds for retirement? 

Yes, investing in both can help you balance risk and return, building a stable retirement corpus over time. 

2. How do tracking errors differ between ETFs and mutual funds? 

ETFs may experience slight tracking errors as they replicate an index’s performance. The smaller the error, the more accurately the ETF tracks its benchmark. 

3. Can I automate my investments in ETFs like I can with mutual funds? 

Usually, SIPs (Systematic Investment Plans) are available for mutual funds but not for ETFs. ETFs need to be purchased manually through your trading account.