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What is the Difference Between ETF and Mutual Fund?
Reviewed by: Fibe Research Team
- Updated on: 27 Nov 2025
Reviewed by: Fibe Research Team
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.
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.
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.
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.
Just like mutual funds come in different types, ETFs also have various categories. Here are some popular ones to help you choose:
Understanding these types helps you diversify your portfolio across risk levels and asset classes.
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.
So, if you value quick access to your money, ETFs offer more liquidity.
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.
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.
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.
Yes, investing in both can help you balance risk and return, building a stable retirement corpus over time.
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.
Usually, SIPs (Systematic Investment Plans) are available for mutual funds but not for ETFs. ETFs need to be purchased manually through your trading account.
