ETFs vs Mutual Funds: Which is Better?

Published on July 31, 2025 | 4 min read

Summary

ETFs and mutual funds both offer a low-cost way to invest in the stock market. ETFs are passively managed and track the underlying index or asset, whereas mutual funds are actively managed, more diversified and offer various types of funds.

Key Takeaways

ETFs and mutual funds are popular investment vehicles with different management styles and trading mechanisms.
ETFs are listed on stock exchanges and can be bought and sold during market hours.
Mutual funds pool money from investors and invest in diversified asset classes to generate returns.

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Introduction

Exchange-traded funds (ETFs) and mutual funds are both popular investment options, but they differ in their management and trading styles.

ETFs are traded on exchanges like stocks and are typically passively managed. In contrast, mutual funds are actively managed by professional fund managers, and their unit price is determined by net asset value (NAV).

With this understanding, let’s look in more detail at what ETFs and mutual funds are and how they differ.

What are ETFs?

ETFs are investment funds that track an index, a sector, a commodity, or an asset, and can be bought or sold on stock exchanges. These funds aim to mirror the performance of a particular index, such as the Nifty 50 or the Sensex, by holding the same securities in equal proportions.

The price of an ETF fluctuates based on market supply and demand. They typically feature lower expense ratios than actively managed funds, making them cost-efficient options for long-term investors.

What are Mutual Funds?

Mutual funds are investment vehicles that pool money from multiple investors to invest in diversified asset classes such as equities, debt, and other securities.

There are different types of mutual funds, like equity funds, debt funds, and hybrid funds. They aim to achieve specific financial goals, such as income generation, capital appreciation, or tax savings.

The value of mutual funds is demonstrated as net asset value. It represents the per-unit value of the fund’s assets after deducting the liabilities.

Difference Between ETFs and Mutual Funds

Here is the comparison table that shows the difference between ETFs and mutual funds:

Features	ETFs	Mutual Funds
Management Style	ETFs are passively managed because they mirror the index or sector	It can be actively or passively managed.
Listing status	They are listed on the stock exchange and traded similarly to stocks	They are not listed on the stock exchange
Pricing	Prices fluctuate based on demand and supply	Priced at the end of the day as per net asset value
Expense Ratio	Lower due to passive management	Higher for actively managed funds
Minimum Investment	No minimum investment criteria exist; you can buy even 1 share	Minimum investment is required; it can be 100, 500, 1000, or 5000, depending
	of an ETF	on the fund
Liquidity	High liquidity compared to mutual funds. ETFs can be bought and sold	Low liquidity, purchases and redemptions processed after market close
	easily during market hours
Tax Efficiency	More tax-efficient with lower capital gains tax	Mutual funds are less tax-efficient
Diversification	ETFs are more focused on specific indexes, therefore less	Mutual funds provide more diversification and exposure to a broader range
	diversification	of securities

Who Should Invest in ETFs?

ETFs are the best-suited variety for investors:

Beginners with a low investment amount

ETFs provide easy access to a diversified portfolio with a relatively small investment. You can even buy a single share directly from the market.

Low Risk Appetite Investors

Investors with a low-risk appetite who still want direct exposure in stocks may consider ETFs.

High liquidity

Investors who want high liquidity and mirror the performance of the index may prefer ETFs.

Experience Traders

Traders can use ETFs for tactical asset allocation, sector rotation, or hedging because intraday trading is allowed in ETFs.

Who Should Invest in Mutual Funds?

Mutual Funds are best suited for the following investors:

Busy professionals

If you don’t have time to actively manage your investment, then go for mutual funds. They are professionally managed and do not require daily monitoring.

Long-term Investors

These investors can invest in mutual funds because they get a variety of options for portfolio diversification.

SIP

Investors who want to invest a small portion of their money at a fixed interval can invest in mutual funds through a Systematic Investment Plan (SIP).

Both ETFs and mutual funds offer investment options to generate returns. However, they differ in investment style, purchase and sale, pricing, performance, fees, and risk.

Investors must carefully analyse their investment goals and choose the option that best aligns with their risk appetite and investment objectives.

About Author

Subhasish Mandal

Sub-Editor

Finance professional with strong expertise in stock market and personal finance writing, he excels at breaking down complex financial concepts into simple, actionable insights. Holding a Master’s degree in Commerce, he combines academic depth with practical knowledge of technical analysis and derivatives.

Read more from Subhasish

About Upstox

Upstox is a leading Indian financial services company that offers online trading and investment services in stocks, commodities, currencies, mutual funds, and more. Founded in 2009 and headquartered in Mumbai, Upstox is backed by prominent investors including Ratan Tata, Tiger Global, and Kalaari Capital. It operates under RKSV Securities and is registered with SEBI, NSE, BSE, and other regulatory bodies, ensuring secure and compliant trading experiences.