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Mutual Funds vs ETFs- What is best for you?

No non-sense guide for you on low-cost investments

Author

SK
August 30, 2025

Hello,

Welcome to Paisa Monk → No non-sense finance content for middle class Indians!

This is the article #9. If you’ve missed the previous ones, read it now!

Today we’ll breakdown Mutual Funds and ETFs through a short story! This is the highly requested topic in my DMs by many of you on reddit.

By the end of this post, you’ll be able to decide by yourself which is best for you.

 Join the reddit sub now to discuss and de-influence personal finance. You can follow the weekly discussions or post your questions!

Disclaimer: As a PaisaMonk author, I will not give any investment advice, instead I’ll provide you a view point with well researched facts to help you decide which instrument is best for you.

Ramesh and Priya, both in their early 30s, work in Hyderabad.

Ramesh is risk-aware but, busy- he prefers a guided, hands-off approach. He invests via mutual funds, especially SIPs in diversified or hybrid funds.

Priya, working from home, loves share markets- she tracks Nifty daily and trades via ETFs when she spots dips.

One evening over chai, Ramesh asked, “Priya, why ETFs when mutual funds seem simpler?” She replied:

❝

“Think of mutual funds like your friendly neighborhood auto-rickshaw that comes once a day at a fixed fare-steady and dependable. ETFs are like autos available all day long, with fares that change a bit, but you have flexibility.”

Without getting into too much technical details, I’ll break it down for you:

1. How They Trade

  • Mutual Funds: Bought or sold once a day, at the Net Asset Value (NAV) calculated after market close.

  • ETFs: Traded like stocks throughout market hours, prices fluctuate with demand and supply.

Priya loves tracking stock markets actively- so she enjoys ETFs’ real-time action.

Ramesh values simplicity and is fine with daily NAVs.

2. Costs That Matter

  • Mutual Funds: Often actively managed, so expense ratios can be higher- sometimes around 1–2%. Includes management fees, loads, etc.

  • ETFs: Usually passive, tracking indices like Nifty. Expense ratios are much lower- some even below 0.1%. But you pay brokerage, STT, GST, stamp duty on every trade just like stocks.

Priya trades strategically, so she saves long-term.

Ramesh loves SIP discipline- he doesn’t mind paying a slightly higher charge for ease.

3. Liquidity & Flexibility

  • Mutual Funds: Invest via fund house or platforms; NAV applies end of day. No intraday trades.

  • ETFs: Instant buy/sell during trading hours- high liquidity.

Priya likes being nimble. Ramesh finds mutual funds calming and SIP-friendly.

4. Tax Efficiency

  • Equity Mutual Funds & Equity ETFs → Identical taxation (20% STCG, 12.5% if LTCG > ₹1.25 lakh).

  • Debt, Gold, International (MFs & ETFs) → Identical taxation (added to income, taxed at slab rate).

Short-Term Capital Gains (STCG): For assets held for less than 12 months in case of equity shares, ETFs, units of equity-oriented mutual funds, and units of business trust.

Long-Term Capital Gains (LTCG): For assets held over 12 months in case of equity shares, ETFs, units of equity-oriented mutual funds, and units of business trust.

5. Diversification & Management Style

  • Mutual Funds: Wide variety- actively managed equity, debt, hybrid, ELSS (tax saver), etc. For example, ELSS offers tax benefits under Section 80C and has a 3-year lock-in.

  • ETFs: Mostly passive, tracking indices (e.g., Nifty 50). Diversified within that segment- very transparent but doesn’t aim to outperform.

Ramesh likes having fund managers choose for him. Priya is happy mimicking the market index low-cost.

  • Mutual Funds: As of December 2023, AUM reached over ₹50 lakh crore- growing ~23% in 2023. However, 73% of units were redeemed within 2 years; only 3% stayed beyond 5 years.

  • ETFs: April 2025 saw record inflows- ₹19,056 crore. Passive funds' AUM reached ₹11.91 lakh crore. ETFs’ rising popularity reflects growing investor trust.

Gen-Z investors in India are particularly drawn to ETFs for transparency and low cost! Seems like they’ve come out of the “LIC is the only savior” mindset. In case, you’re planning a buy any LIC policy, you must read this article

So, What is the best for you?

Mutual Funds are the best for you if:

  • You want a hands-off approach (let fund managers handle the decisions).

  • You’re a beginner who prefers SIPs and doesn’t want to monitor daily prices.

  • You want tax benefits (under Sec 80C)- Applicable only in case of ELSS funds.

  • You like diversified options: equity, debt, hybrid, gold, international exposure.

Example: If you’re a salaried employee investing ₹5,000 every month for retirement - mutual funds (through SIPs) will give you discipline + growth without daily tracking.

ETFs are the best for you if:

  • You’re cost-conscious and don’t want to pay high management fees.

  • You’re comfortable with a brokerage account & stock trading apps.

  • You want intraday flexibility (buy/sell whenever markets move).

  • You believe in “beating fees, not the market” - i.e., tracking the Nifty/Sensex at the lowest cost.

Example: If you’re 28, tech-savvy, and check markets daily - buying a Nifty 50 ETF during dips can give you low-cost exposure to India’s top companies.

Why not do both? Allocate for SIP-based mutual funds, and top up occasionally with ETFs when market dips. This is my personal preference too!

This way, you get discipline + flexibility, active + passive, growth + cost savings.

Share this with your friends and save them from being locked into LIC plans.

Feel free to write your suggestions/feedback to [email protected].

For discussions on this topic, let’s jump on to reddit!

That’s all for today, see you again!

Yours,
Paisa Monk