Mutual funds vs ETFs: What’s the difference and which one should you pick?

Investors today have more choices than ever to grow their money. Two of the most popular options are mutual funds and exchange-traded funds (ETFs). Both offer diversification and professional management, but they work quite differently and understanding those differences can help you decide which fits your investment style.

Mutual funds: The traditional favourite

Mutual funds pool money from investors and invest it across stocks, bonds, or other assets. They are run by professional fund managers who decide where to invest. But there’s one key catch — you can buy or sell a mutual fund only once a day, at the fund’s net asset value (NAV).

For most people, mutual funds are a “set and forget” investment. They’re especially popular for systematic investment plans (SIPs), where small amounts are invested every month.

ETFs: The modern, flexible choice

ETFs, or exchange-traded funds, are like mutual funds but trade on the stock exchange, just like shares. Their prices move in real time as markets go up or down. This means you can buy or sell them anytime during market hours.

Most ETFs simply track an index, like the Nifty 50 or Sensex, instead of being actively managed. That helps keep costs low. But unlike mutual funds, you’ll need a demat account and a broker to invest in ETFs.

Costs, liquidity and tax impact

Mutual funds often have slightly higher expense ratios, especially if they are actively managed. ETFs are cheaper, but you may pay brokerage fees when trading.

In terms of taxation, both are subject to capital gains tax, but ETFs tend to be more tax-efficient due to fewer internal transactions. Liquidity is another advantage for ETFs since they can be traded anytime, while mutual funds settle at day’s end.

So which one is better?

If you prefer a simple, long-term approach and don’t want to monitor markets daily, mutual funds are a great fit. But if you like real-time control, transparency, and lower costs, ETFs might be better.

There’s no one-size-fits-all answer. Many investors actually use both, mutual funds for disciplined, regular investing and ETFs for tactical exposure to specific sectors or indices.

The key is to pick what matches your comfort level, goals, and how actively you want to manage your money.