Let’s simplify one of the most common debates in investing—ETFs vs. Mutual Funds. We will help you decide what’s right based on your financial goals, investment style, and risk tolerance.

The News

The mutual fund industry’s total AUM moved up impressively by 43.30%, from ₹47.80 lakh crores in October 2023 to ₹68.50 lakh crores by October 2024, implying a surging confidence among Indian investors in these instruments.

ETFs comprised 12.6% of the total AUM in October 2024, marking an increasing share in the overall investment context.

Both ETFs and mutual funds pool investors’ money to build diversified portfolios. But which one suits you best? Let’s dive deeper into these investment tools to see what they offer, starting with mutual funds.

Mutual Funds

Mutual funds pool money to invest in various assets, managed by a professional fund manager aiming to outperform benchmarks.

Because of these exact two things–professional management and the target to outperform the benchmark, mutual funds charge higher fees relative to an ETF.

Additionally, when you invest in a mutual fund, you buy or redeem units directly from the fund house at the end-of-day Net Asset Value (NAV).

Let’s talk about ETF now.

ETFs

ETFs combine features of stocks and mutual funds. They are passively managed, tracking indices like the BSE Sensex or the Nifty 50. Imagine it as an index fund but trading on an exchange.

Just like a stock, ETFs are traded on stock exchanges throughout the day at market prices, offering liquidity and real-time access.

Here, the fees you pay are low due to passive management. And because you buy an ETF from a stock exchange, there are additional exchange-related fees and brokerage.

Key Similarities

Diversification:
Both provide access to a basket of securities, reducing risk through diversification.

Pooling of Funds:
Both collect money from multiple investors to create a portfolio.

Ease of Investment:
Both are suitable for beginners, offering varied options for different financial goals and risk appetites.

Key Differences

Trading Mechanism:
Mutual funds are transacted at end-of-day NAV, while ETFs trade intraday, like stocks.

Management Style:
Mutual funds are often actively managed; ETFs are passively managed, tracking an index.

Costs:
Mutual funds generally have higher expense ratios; ETFs are more cost-efficient but include brokerage fees.

What’s suitable for what kind of investors?

Mutual Funds are perfect for those who value professional expertise and want a hands-off approach to beat the market returns.

ETFs are suitable for investors who prefer flexibility, lower costs and are comfortable with market returns. Great for those building a DIY portfolio aligned with market indices.

To Conclude

Is one the better than other? The answer is no. The most appropriate option depends on an investor’s specific aims and needs.

Rather, using both can balance an investment portfolio, as the strengths of the two can promote a varied, flexible investing plan personalized to meet financial goals.