The best of both worlds: Mutual funds and ETFs for smarter investing in 2025

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As investors weigh between actively managed mutual funds and low-cost ETFs, 2025 brings fresh perspectives on how both can fit into a portfolio. Rather than viewing them as rivals, the real opportunity lies in understanding how each complements the other

Over the past few years, the conversation among investors has often revolved around one question: should you invest in actively managed mutual funds or stick to low-cost Exchange Traded Funds (ETFs)? With ETFs gaining immense popularity worldwide for their simplicity and cost-effectiveness, it is natural to wonder whether mutual funds can still deliver an edge, particularly in 2025.

Mutual funds, especially actively managed equity schemes, have traditionally attracted investors by promising to outperform the market through professional fund management. Skilled fund managers aim to identify undervalued opportunities and manage risks better than a passive index. On the other hand, ETFs simply mirror an index, providing returns that are almost identical to the benchmark, minus minimal expenses.

In India, the ETF market has grown rapidly over the past decade, largely due to rising awareness, lower costs, and institutional participation. Equity ETFs tracking indices like Nifty 50, BSE Sensex, and sectoral benchmarks have attracted strong inflows. For many investors, ETFs are a straightforward way to own the market at very low expense ratios, often below 0.20 per cent.

However, mutual funds are far from obsolete. In fact, 2025 could highlight areas where mutual funds continue to hold their ground. One key factor is market efficiency. In highly efficient markets such as U.S. Large-Caps, ETFs often dominate because active managers struggle to consistently beat benchmarks. But in India, where market inefficiencies and information gaps still exist, active mutual fund managers often find opportunities to generate alpha. Mid-Cap and Small-Cap funds, in particular, have historically outperformed their benchmarks over longer periods.

Another consideration is investor behaviour. Mutual funds, through systematic investment plans (SIPs), encourage discipline and consistency. ETFs require investors to buy and sell directly on the stock exchange, which demands some level of market timing and execution. For retail investors not comfortable with trading, mutual funds remain a more convenient choice.

That said, ETFs are no longer limited to plain vanilla index tracking. Sector ETFs, international ETFs, and thematic ETFs are expanding choices for investors who want targeted exposure without relying on active selection. This growing variety may make ETFs more attractive to younger investors who prefer a do-it-yourself approach with lower costs.

So, can mutual funds still outperform ETFs in 2025? The answer is yes, but selectively. Well-managed funds in less efficient segments like mid and small caps, or in niche themes, still have the potential to deliver better returns than index-tracking ETFs. For large-cap exposure, however, ETFs may remain tough to beat due to cost advantages.

For investors, the best approach may not be ‘mutual funds versus ETFs’ but a thoughtful combination of both. Mutual funds can serve as the core for disciplined wealth creation, while ETFs can complement portfolios with low-cost, diversified, or thematic exposure. The challenge, as always, lies in choosing wisely.