Short answer: An exchange-traded fund (ETF) is a pooled basket of securities that trades on a stock exchange like a share, so its price changes through the day. A mutual fund is also a pooled basket, but its units are bought and sold with the fund house at the day’s closing Net Asset Value (NAV), a per-unit value. The differences in how they trade also affect their costs, management and tax treatment.
Last reviewed: 7 November 2026
At a glance
| Feature | ETF | Mutual fund |
|---|---|---|
| How it trades | On a stock exchange, priced live through the day | With the fund house at end-of-day NAV |
| Management style | Usually passive, copying an index such as the Nifty 50 | Mostly actively managed by a fund manager who tries to beat the market |
| Ongoing expense ratio | Generally lower | Generally higher |
| Charges per purchase | Brokerage and statutory charges on each transaction | No brokerage when bought through the fund house |
| Systematic investing | Index ETFs do not support SIPs or automatic investing | Offers systematic investment plans (SIPs) and automatic investing |
| Tax efficiency | Generally more tax-efficient | Generally less tax-efficient |
How are the two priced and traded?
An ETF has a market price that moves as buyers and sellers trade it during market hours. You can see that price change while the market is open, and the price you get depends on when your order executes. A mutual fund does not have a live price for you to trade against. Your purchase or sale is settled at the NAV set at the end of the day.
The hypothetical example below uses invented figures only, to show the arithmetic.
Hypothetical example (all figures invented for illustration): Suppose a mutual fund’s closing NAV is ₹50 per unit and you invest ₹1 lakh. ₹1,00,000 divided by ₹50 gives 2,000 units. Suppose an ETF trades at ₹100 per unit at 10 am and ₹101 at 2 pm. Ten units cost ₹1,000 in the morning and ₹1,010 in the afternoon.
The ETF example shows why the time of your order matters. In the mutual fund case, you would not know the exact price until the day’s NAV is published.
How do they differ in management?
Most ETFs are passive, meaning they aim to copy an index such as the Nifty 50 rather than pick individual securities. If the index falls, the ETF is designed to fall with it. Most mutual funds are actively managed, meaning a fund manager chooses what to hold and tries to beat the market.
Active management has a catch. Trying to beat the market does not guarantee success, and the fund may trail the index. Passive management avoids that manager decision, but it also means the fund will not try to do better than its index.
What do they cost to own and to trade?
The expense ratio is the yearly charge a fund takes from its assets, expressed as a percentage. ETFs generally carry lower expense ratios than mutual funds, mainly because they are passively managed. A lower ratio is only one part of the cost.
Buying or selling an ETF incurs brokerage and statutory charges on every transaction. Mutual fund purchases made through a fund house carry no brokerage. So an ETF with a low expense ratio can still cost more overall if you trade it often, because each trade adds charges.
Can you invest small amounts regularly?
A systematic investment plan (SIP) is a method of putting a fixed amount into a fund at set intervals. Mutual funds offer SIPs and automatic investing. Index ETFs do not support these features.
For an ETF, each regular purchase must be placed on the exchange and carries brokerage and statutory charges. Those charges repeat with every instalment. A mutual fund SIP avoids brokerage at the fund house, though the fund’s expense ratio still applies.
How are they taxed?
ETFs are created and redeemed in large blocks through authorised participants, which are large institutions that exchange baskets of securities with the fund. This process helps limit capital gains distributions to investors. A capital gain is the profit made when you sell an investment for more than you paid.
Because of this structure, ETFs are generally more tax-efficient than mutual funds. They tend to produce fewer taxable capital gains for investors. This describes how the structure typically works, not what tax you will pay. Your own tax position depends on your circumstances, and a tax professional can explain it.
What are the risks in each?
Both types can lose value. An ETF that tracks an index falls when that index falls, and a mutual fund’s NAV falls when its holdings fall. Neither is protected from market movements.
Each type has its own practical catch. ETF prices move during the day, so you may buy or sell at a price different from the one you saw a few minutes earlier. Mutual fund units are priced once a day, so you will not see the exact price your order gets until after the day’s close.
Frequently asked questions
Is an ETF always cheaper than a mutual fund?
ETFs generally carry lower ongoing expense ratios than mutual funds. However, each ETF purchase or sale incurs brokerage and statutory charges, so total cost depends on how often you trade.
Can I run a SIP in an ETF?
Index ETFs do not support systematic investment plans or automatic investing. Mutual funds offer both.
Which one is more tax-efficient?
ETFs are generally more tax-efficient because their creation and redemption process tends to produce fewer taxable capital gains for investors. Your own tax outcome depends on your circumstances.
Can I buy mutual fund units at a live price during the day?
No. Mutual fund units are bought and sold with the fund house at the end-of-day NAV, not at a live market price.
Sources and last check
Facts in this article were checked against the sources below on 7 November 2026. Rules and figures can change; check the primary source before acting.
- groww.in (broker education)
- kotakneo.com (broker education)
- icicidirect.com (broker education)
- 5paisa.com (broker education)
- zerodha.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.