ETF vs Mutual Fund: Which Is Better for Indian Investors?

Mutual Funds and Exchange-Traded Funds (ETFs) are two of India’s most popular investment vehicles today. While both pool investor money and invest in diversified assets, such as stocks, bonds, or gold, their operations and delivery of results can differ.

Why Investors Compare ETFs and Mutual Funds?

As more Indians explore investing beyond fixed deposits or real estate, questions like “ETF vs mutual fund, which is better​” are becoming common. Investors want to understand which option provides better returns, lower costs, and aligns with their investment style, whether hands-on or hands-off.

What We Will Learn From This Comparison?

This article will outline the basic structure and types of ETFs and Mutual Funds, as well as Key differences in trading, costs, and transparency. It will also compare ETF returns to mutual fund returns and provide real-world performance comparisons. 

Additionally, we will explore how a share advisory company can help you choose the right investment option based on your risk profile, financial goals, and market outlook, ensuring informed and strategic investment decisions.

What is a Mutual Fund and How It Works?

Let’s start by understanding what are mutual funds. A Mutual Fund is a professionally managed investment scheme that pools money from multiple investors and invests it in various assets, such as stocks, bonds, and gold. You buy units of a mutual fund based on its Net Asset Value (NAV), which is calculated at the end of each trading day. 

Additionally, understanding the tax implications of mutual funds is crucial, as capital gains from these investments are subject to taxation based on the type of fund and the holding period, which can impact your overall returns.

Types of Mutual Funds in India

1. Equity Mutual Funds – These funds invest primarily in shares of companies for long-term capital growth. Some examples include the SBI Bluechip Fund and the Axis Long Term Equity Fund.
2. Debt Mutual Funds – They invest in fixed-income instruments, such as corporate bonds, treasury bills, and government securities, offering more stability and predictable returns. Examples include the HDFC Corporate Bond Fund and the ICICI Prudential Gilt Fund.
3. Hybrid Funds – Hybrid funds combine equity and debt investments to balance risk and reward, offering moderate returns with reduced volatility.  Examples are ICICI Prudential Balanced Advantage Fund and HDFC Hybrid Equity Fund.
4. Index Funds – These passively managed funds mirror a market index, such as the Nifty 50 or Sensex, aiming to match its performance at a low cost.  Examples include Nippon India Index Fund – Sensex Plan and UTI Nifty Index Fund.
5. Thematic or Sectoral Funds – These focus on specific sectors, such as IT, pharmaceuticals, or banking, and are ideal for investors with a high risk appetite and sector knowledge. Examples are SBI Technology Opportunities Fund and Nippon India Pharma Fund.
6. Gold Mutual Funds – They indirectly invest in gold through Gold ETFs or other gold-linked instruments, offering a hedge against inflation.  Examples are HDFC Gold Fund and Kotak Gold Fund.

What is an ETF (Exchange-Traded Fund) and How ETFs Work?

An Exchange-Traded Fund (ETF) is a fund that trades on stock exchanges, just like a stock. It tracks an index, commodity, or sector, and investors can buy or sell ETFs at any time during market hours. ETFs are passively managed, meaning they simply mirror an index without trying to outperform it.

Types of ETFs in India

• Equity ETFs – Equity ETFs track stock market indices like Nifty 50, Sensex, or Nifty Bank, offering diversified equity exposure with low cost and flexibility.
  Example: Nippon India ETF Nifty BeES, ICICI Prudential Nifty Next 50 ETF.
• Gold ETFs –  Gold ETFs invest in physical gold prices without the hassle of storage, making them ideal for hedging against inflation and portfolio diversification.
  Example: HDFC Gold ETF, SBI Gold ETF.
• Debt ETFs –  Debt ETFs invest in fixed-income instruments such as government securities or corporate bonds, offering safer returns with lower volatility.
  Example: Bharat Bond ETF, ICICI Prudential Nifty PSU Bond Plus SDL ETF.
• International ETFs – International ETFs track foreign indices, such as the Nasdaq 100 or the S&P 500, offering Indian investors exposure to global markets.
  Example: Motilal Oswal Nasdaq 100 ETF, Edelweiss MSCI India Domestic & World Healthcare 45 ETF.
• Sectoral ETFs –  Sectoral ETFs focus on specific sectors such as banking, pharma, or IT, and are suitable for thematic investing.
  Example: Nippon India ETF Bank BeES, ICICI Prudential IT ETF.

ETF vs Mutual Fund: Key Differences

If you’re planning to invest in either a mutual fund or an ETF, it’s essential to understand the differences and know what an ETF is versus a mutual fund. It is also essential for investors to learn about ETF vs mutual fund performance​ and look for better results in the long run.

• ETFs can be traded on exchanges throughout the day, just like shares. Prices change in real-time based on market demand and supply.
  
• Mutual Funds are bought or redeemed only at the day’s closing NAV. No intraday trading is involved.
  

Expense Ratio and Cost Efficiency

• ETFs typically have lower expense ratios than mutual funds because they are passively managed.
  
• Actively managed mutual funds charge higher fees for fund management and research.
  

Transparency and Holdings Visibility

• ETFs disclose their portfolios on a daily basis, providing clear visibility into the underlying assets.
  
• Mutual Funds usually disclose holdings monthly or quarterly.
  

So if you prefer transparency, ETFs win here.

Liquidity and Access

• ETFs require a demat account and brokerage to trade. Liquidity depends on market volumes.
  
• Mutual Funds can be bought easily via SIPs, apps, and platforms, and are great for beginners.
  

Mutual funds offer more convenience when investing in regular investments, such as SIPs.

Active vs Passive Management

• Mutual Funds (especially equity funds) are often actively managed to beat the market.
  
• ETFs mostly follow passive strategies by tracking an index.
  

If you believe in active management strategies, mutual funds may be a suitable option for you. But for market-average returns at lower cost, ETFs are ideal.

ETF vs Mutual Fund Returns in India: Which Delivers Better Returns Historically

• Historically, actively managed equity mutual funds have occasionally outperformed index-tracking ETFs, particularly in small-cap and mid-cap segments.
  
• However, Nifty 50 or Sensex ETFs have delivered strong long-term returns with lower volatility.
  

How Expense Ratios and Tracking Errors Impact Returns?

• Higher expense ratios in mutual funds can reduce your net return.
  
• ETFs can suffer from tracking errors, which means the ETF doesn’t perfectly mimic its index.
  

When comparing ETFs vs. mutual fund returns in India, always consider post-cost returns.

When Passive ETF Investing Outperforms Active Mutual Funds?

In rising markets where most stocks perform well, ETFs often outperform due to lower costs. Also, during volatile or uncertain periods, passively managed ETFs show resilience.

ETF vs Mutual Fund Performance: Real Examples 

• Nippon India ETF Nifty 50 BeES –  5-year CAGR 24 Apr 2020 – 24 Apr 2025) 169% Source: ET Money
  
• ICICI Prudential Bluechip Fund Direct-Growth – 5 year CAGR 24 Apr 2020 – 24 Apr 2025 25.29% Source: ET Money

The ETF delivered significantly higher returns than the mutual fund over the same 5-year period, indicating outperformance in capital appreciation. This suggests that, during this specific timeframe, the passively managed Nippon India ETF Nifty 50 BeES not only kept pace with the market but also far exceeded the returns of the actively managed ICICI Prudential Bluechip Fund. Such outperformance may be attributed to lower expense ratios, a strong market rally in large-cap stocks, or a low entry price during a market dip. 

Performance of Gold ETFs vs Gold Mutual Funds

• Gold ETF (e.g., SBI Gold ETF): Tracks the gold price directly.
  
• Gold Mutual Fund (e.g., HDFC Gold Fund): Indirectly invests in Gold ETFs.
  

​When comparing the performance of Gold ETFs and Gold Mutual Funds, both investment vehicles have demonstrated similar returns over specific periods.  

For those considering gold ETFs in 2025, several top-performing options stand out due to their consistent returns over the past year (2024). Axis Gold ETF leads with an impressive 1-year return of 26.08%, followed by HDFC Gold ETF at 25.62%, and ICICI Prudential Gold ETF at 25.39%. 

If you’re focusing on gold mutual funds in 2025 based on 1-year returns,  Quantum Gold Fund leads with a return of 25.52%. It is followed closely by Aditya Birla Sun Life Gold Fund at 25.18% and Quantum Gold Savings Fund at 25.05%. Kotak Gold Fund also delivered a solid return of 24.83%. These funds have shown strong momentum over the past year, making them appealing choices for near-term gold investments.Source: Financialexpress.com

Regarding physical gold, it has generated impressive returns over the past 10 to 15 years. According to the India Bullion and Jewellers Association (IBJA), gold prices have increased by approximately 9–10% annually from 2010 to 2025 and by nearly 12% per year over the past decade, surpassing many conventional fixed-income investments. 

During the same period, gold ETFs have offered similar returns, slightly lower due to the fund management fees, which typically range from 0.3% to 1%.

For example, Nippon India Gold ETF and SBI Gold ETF have delivered average annual returns of approximately 8.5% to 9.5% from 2015 to 2025.  Source: Moneycontrol

These figures indicate that Gold ETFs and Gold Mutual Funds have provided similar returns over these periods. Gold ETFs are slightly more cost-efficient. But for SIP users or those without a demat account, gold mutual funds offer easier access. 

Investor Profiles That Suit ETFs 

ETFs are better for:

• Investors are comfortable with online trading platforms
  
• Investors want to monitor holdings regularly.
  
• Short-term traders and those with a demat account
  
• Cost-sensitive investors
  

Investor Profiles That Suit Mutual Funds 

Mutual Funds Suit:

• New investors seeking automated and guided investing
  
• Long-term SIP investors looking for wealth creation
  
• Investors without a demat account
  
• Those who prefer expert management
  

Which Option Is Better for Long-Term Wealth Creation?

ETFs could be a good option for long-term investors seeking consistent returns and lower expenses. Index ETFs, which track broad market benchmarks, offer diversification and typically have lower expense ratios than actively managed mutual funds. Similarly, gold ETFs provide a cost-effective investment in the precious metal. Lower costs and diversified exposure can contribute to more stable long-term growth.

ETF vs Mutual Fund Comparison   

Feature	ETFs	Mutual Funds
Management Style	Usually passive: mirrors an index like the Nifty 50 or the Sensex	Actively or passively managed by fund managers
Trading	Traded on stock exchanges in real time like shares	Bought or sold at end-of-day NAV
Expense Ratio	Generally lower	Typically higher due to active management
Liquidity	High: can be traded anytime during market hours	Moderate: Transactions are processed once daily
Transparency	High: Holdings are disclosed daily	Monthly or quarterly disclosures
Tax Efficiency	More tax-efficient due to the structure	May have higher tax implications due to capital gains
Mode of Investment	Through a demat and trading account	Through mutual fund platforms or SIPs
Best Suited for	DIY investors are cost-sensitive, market-savvy individuals	Beginner or long-term investors looking for professional management

Conclusion

When evaluating an ETF versus a mutual fund, it is essential to note that both are practical investment tools. ETFs are simple, low-cost, and efficient—ideal for those who enjoy monitoring and trading regularly. On the other hand, Mutual Funds are like manual driving—you may gain more control and potentially better returns with skill, but you might also face a few bumps along the way.

If you prefer a hands-off approach with the convenience of regular investing, mutual funds with Systematic Investment Plans (SIPs) are a great option. You can even use a SIP calculator to estimate long-term returns and plan your investments more efficiently.

There’s no one-size-fits-all answer to ETF vs mutual fund, which is better—your financial goals, risk tolerance, and investment experience should guide your choice.

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