Mutual Funds Vs ETF - Differences and Which is Better

When you compare mutual funds vs ETFs, both options can give you access to a group of investments through one product. The main difference is how you buy, sell and manage them.

Mutual funds can be actively or passively managed. ETFs are traded on stock exchanges during market hours and most ETFs track an index. Mutual funds are generally bought or redeemed based on the fund's NAV.

This article explains the key differences between mutual funds and ETFs, including trading, costs, diversification, risk and investment approach. It also explains the types of products available and what you should consider before choosing between them.

Mutual funds and ETFs both let you invest in a group of assets through one investment product. The main difference is how they are bought, sold and priced.

• Mutual funds: Transactions use the applicable NAV. Mutual funds can be actively or passively managed.
• ETFs: ETFs trade on stock exchanges during market hours. Most ETFs track an index.
• Pricing: ETF market prices change during trading hours and can differ from their NAV. Mutual fund transactions use the applicable NAV.
• Costs: Expense ratios vary across funds. ETFs can also involve trading-related costs.
• Diversification: Both products can provide exposure to several securities through one investment.
• Risk: Risk depends mainly on the underlying assets and investment strategy. Check the applicable SEBI riskometer for mutual fund schemes.
• Choice: Consider your investment goal, investment horizon, preferred trading method, costs and risk level before choosing.
• Bajaj Broking website: The platform offers 4,000+ mutual fund schemes across equity, debt, hybrid, ELSS, thematic and NFO categories. An SIP starts from Rs. 100 per month for applicable schemes, and lumpsum investment is available for most schemes.

Neither product is automatically better than the other. Understanding how each works can help you compare the specific investment options that match your requirements.

Mutual funds pool money from several investors and invest it in assets such as shares, bonds and other securities. Each investor receives units in the fund based on the amount invested.

A mutual fund has a portfolio, which means a collection of investments held by the fund. The portfolio is managed according to the fund's stated objective.

Mutual funds can be actively managed or passively managed. In an actively managed fund, the fund manager selects investments based on the fund's strategy. In a passive fund, the portfolio aims to track a market index.

What is NAV in a mutual fund?

NAV stands for Net Asset Value. It represents the value of one unit of a mutual fund based on the value of the fund's underlying assets, after applicable expenses.

The NAV is calculated at the applicable valuation point. When you invest in or redeem a mutual fund, the applicable NAV is used according to the scheme's rules and cut-off requirements.

You can learn more about NAV through this Net Asset Value guide.

Mutual funds are subject to market movements. The value of your investment can rise or fall depending on the securities held by the fund.

Exchange-traded funds, or ETFs, are funds that trade on a stock exchange. An ETF can hold a group of securities and can track an index, sector, commodity or another underlying asset.

Most ETFs are passively managed and aim to track the performance of their underlying index. Actively managed ETFs also exist in some markets.

Unlike a mutual fund transaction that is processed using the applicable NAV, an ETF can be bought or sold on a stock exchange during market hours. Its market price changes during the trading session based on demand and supply.

You can read more about ETFs in this ETF guide.

An ETF's market price can be different from its NAV. This is because the ETF trades on an exchange, where the price is determined by buyers and sellers.

ETFs are also subject to market risk. The level of risk depends on the assets held by the ETF.

The main difference between mutual funds and ETFs is how they are traded. ETFs trade on stock exchanges during market hours, while mutual fund transactions are processed based on the applicable NAV.

There are also differences in management style, costs, pricing and the way you place an order.

Here are the main factors to compare when looking at mutual funds vs ETFs:

• Trading: ETFs trade on stock exchanges during market hours. Mutual fund transactions are processed using the applicable NAV.
• Management: Mutual funds can be actively or passively managed. Most ETFs track an index, although actively managed ETFs also exist.
• Pricing: ETF market prices change during market hours. Mutual funds use the applicable NAV for transactions.
• Costs: Expense ratios vary across funds. You should compare the expense ratio and other applicable costs rather than assume one structure always costs less.
• Liquidity: ETFs can be bought and sold on an exchange during market hours. The actual ease of buying or selling an ETF also depends on trading activity.
• Investment approach: ETFs often track an index or other underlying asset. Mutual funds can follow active or passive strategies.

• Investment planning: You can use tools such as an SIP calculator and lumpsum calculator available on Bajaj Finance to estimate potential investment values.

  
  

These differences can help you understand which structure matches your investment preferences. However, the product structure alone does not decide whether an investment is suitable for you.

The following table gives a simple comparison of the main differences between ETFs and mutual funds.

There is no single factor that makes one option better than the other. You should consider the underlying investment, costs, trading method, investment horizon and risk level.

ETFs and mutual funds have several features in common. Both allow you to invest in a portfolio instead of selecting every individual security yourself.

The key similarities are:

• Diversification: Both can hold several securities, helping spread your investment across multiple holdings.
• Professional management: Both structures can involve professional management, depending on the fund.
• Different investment choices: Both are available across different asset classes and investment strategies.
• Market risk: Both can lose value when the underlying investments fall in value.
• Defined investment objective: Each fund follows a stated investment approach that explains where and how it invests.

The level of diversification and risk depends on the specific fund or ETF you choose.

ETFs and mutual funds are available in different forms. The right category depends on the assets held by the fund and its stated investment objective.

Types of ETFs

The following are common ETF categories covered by the source article.

The risk of an ETF depends on the assets it holds. An equity ETF and a bond ETF, for example, can have different risk characteristics.

Types of mutual funds

The mutual fund categories below are covered in the source article and align with the broader categories available through the Bajaj Broking website.

The Bajaj Broking website offers 4,000+ mutual fund schemes across equity, debt, hybrid, ELSS, thematic and NFO categories.

Mutual funds and ETFs use different methods for buying and selling units.

When you redeem a mutual fund, the transaction is processed using the applicable NAV under the scheme's rules. The final amount also depends on factors such as applicable charges and the number of units you redeem.

ETFs are traded on stock exchanges. You place a buy or sell order during market hours, and the transaction takes place at the market price when the order is executed.

This means ETF prices can change during the day. You should not treat an ETF sale as a guaranteed instant transaction at any particular price. Execution depends on market conditions and available buyers or sellers.

Both ETFs and mutual funds can have distributions, depending on the product structure and the option selected.

A distribution can include income or other amounts paid to investors from the fund. The treatment of these distributions depends on the fund structure and applicable rules.

ETF distributions

ETF distributions can arise from income earned by the fund or other amounts distributed under the ETF's structure.

The frequency and amount of any distribution depend on the specific ETF. Some funds can distribute income, while others can reinvest earnings.

Before investing, review the ETF's scheme or product documents to understand its distribution policy and applicable tax treatment.

Mutual fund distributions

Mutual fund distributions are payments made from the fund to eligible investors under the applicable scheme option.

The amount and timing depend on the fund and the option selected. A distribution should not automatically be treated as an additional return because the fund's NAV can adjust after a distribution.

Tax treatment also depends on the type of income and the rules applicable at the time.

ETFs give you control over the price at which you place a buy or sell order on the exchange. You can trade them during market hours, subject to market liquidity.

Mutual funds do not trade like shares on an exchange. Transactions use the applicable NAV under the scheme's rules.

Costs also need to be compared carefully. The expense ratio is one cost associated with running a fund. ETFs often have lower expense ratios than actively managed mutual funds, but this is not true for every ETF and every mutual fund.

ETFs can also involve trading-related costs, such as brokerage charges or other applicable demat and transaction charges. Mutual funds can have applicable charges such as exit loads depending on the scheme.

You can learn more about expense ratios through this expense ratio guide. You can also understand exit loads through this exit load guide.

The total cost should therefore be assessed using the specific fund's documents rather than assuming that one product type is always cheaper.

The choice between an ETF and a mutual fund depends on how you want to invest and the type of portfolio you want.

An ETF can suit you if you want to trade on a stock exchange during market hours and track a particular index, sector, commodity or other underlying asset.

A mutual fund can suit you if you prefer a fund structure where transactions are processed using the applicable NAV. Mutual funds also give you access to active and passive investment approaches.

Your choice should also consider:

• your investment goal;
• how long you plan to remain invested;
• the underlying assets;
• the fund's risk level;
• the expense ratio and other applicable costs;

• how you want to buy and sell the investment.

  
  

The financial objectives you are investing for can help you identify the factors that matter most.

For mutual funds, the Bajaj Broking website offers 4,000+ schemes across different categories. The platform also provides tools such as Dashboard, Portfolio, Orders and MF Profile.

If you plan to invest regularly, use an SIP. The minimum SIP on the Bajaj Broking website is Rs. 100 per month for applicable schemes. Lumpsum investment is also available for most schemes.

ETFs are not automatically riskier than mutual funds. The level of risk depends mainly on the assets held by the fund and its investment strategy.

For example, an ETF that tracks an equity index has different risk characteristics from a fund that invests in debt securities. The same principle applies to mutual funds.

ETFs also trade during market hours. Their market prices can therefore move throughout the day. This does not by itself make them more risky, but it means you need to understand how exchange trading works.

Mutual funds are priced using the applicable NAV. However, this does not remove market risk.

When reviewing a mutual fund scheme, check its SEBI riskometer. The risk levels are Low, Low to Moderate, Moderate, Moderately High, High and Very High.

You can also learn more about market volatility and risk tolerance before making an investment decision.

Mutual funds and ETFs both allow you to invest in a portfolio of assets, but they work in different ways.

ETFs trade on stock exchanges during market hours, while mutual fund transactions use the applicable NAV. Mutual funds can be actively or passively managed, while most ETFs track an index.

Costs, liquidity, investment approach, underlying assets and risk are important when comparing the two. Neither product is automatically better for every investor.

If you are considering mutual funds, the Bajaj Broking website offers 4,000+ mutual fund schemes across different categories. You can also compare mutual funds before making an investment decision.

Choose based on the features of the specific product and how they fit your investment goals, time horizon and risk level.

During investing, ETFs and mutual funds stand out as popular choices, each offering unique advantages and considerations. While ETFs provide liquidity, lower expense ratios, and tax efficiency, mutual funds offer active management and broader diversification. Understanding the differences between ETFs vs mutual funds is crucial for investors to align their investment strategies with their financial goals and risk tolerance levels. Ultimately, the decision between the two investment vehicles depends on factors such as investment objectives, time horizon, and personal preferences. Investors can leverage the Bajaj Broking website to access a diverse range of investment options, with over 4,000 mutual funds listed, also giving you the option to compare mutual funds empowering them to make informed decisions tailored to their unique financial aspirations. Fund managers too play an important role in determining the investment habits of an investor.

By carefully assessing the pros and cons of each option, investors can make informed decisions to build a diversified portfolio tailored to their individual needs and preferences.