In 2025, Indian investors face a choice between two popular routes to participate in capital markets: exchange‑traded funds (ETFs) and mutual funds. Both pool money from many investors to buy a diversified basket of securities, but they differ in cost, structure, tax treatment, and flexibility.
- ETF Inflows: April 2025 saw record ETF inflows of ₹19,056 crore, pushing passive funds’ AUM to ₹11.91 lakh crore .
- Mutual Fund Growth: By May 2025, the overall mutual fund industry’s AUM surpassed ₹72.20 lakh crore, driven by a record ₹26,688 crore in monthly SIP contributions .
This blog unpacks the key differences, pros and cons, and practical when‑and‑how of choosing between ETFs and mutual funds in today’s market.
1. What Are ETFs and Mutual Funds?
1.1 Mutual Funds
- Structure: Pooled investment vehicles managed by fund managers.
- Pricing: Bought and redeemed directly with the fund house at net asset value (NAV), calculated once per day after markets close.
- Varieties: Active funds (manager picks stocks) and passive/index funds (track a benchmark).
1.2 ETFs
- Structure: Similar pooled vehicles but trade on stock exchanges like individual shares.
- Pricing: Buy/sell throughout the trading day at market prices, which can trade at a slight premium or discount to NAV.
- Transparency: Holdings are published daily, offering clear visibility into underlying assets.
2. Cost Comparison: Expense Ratios and Beyond
2.1 Expense Ratios
- ETFs: Among the lowest in India. Some flagship index‑tracking ETFs charge as little as 0.05%–0.10% p.a.; debt or gold ETFs often under 0.15%.
- Mutual Funds: Active equity funds average 1.5%–2.0% p.a.; direct plans reduce this by 0.5–0.75 percentage points. Even index mutual funds often sit around 0.30%–0.60% p.a.
2.2 Brokerage and Transaction Costs
- ETFs: Pay brokerage and securities transaction tax (STT) on each buy/sell. A typical flat brokerage of ₹20–₹50 per trade applies.
- Mutual Funds: Zero brokerage; STT applies only on some redemption types.
Bottom Line: For large, infrequent investments, mutual funds may be cheaper overall. For small, regular trading, ETFs often win on lower annual fees.
3. Tax Treatment
3.1 Equity‑Oriented Schemes (including Equity ETFs)
- Short‑Term Capital Gains (STCG): 15% if held ≤ 12 months.
- Long‑Term Capital Gains (LTCG): 10% on gains above ₹1 lakh (no indexation) if held > 12 months.
3.2 Debt‑Oriented Schemes (including Debt ETFs)
- STCG: Taxed as per your income slab if held ≤ 36 months.
- LTCG: Also slab‑rate, with no indexation benefit for investments made after April 1, 2023.
3.3 Gold ETFs
- STCG: 20% if held ≤ 12 months.
- LTCG: 12.5% with indexation if held > 12 months.
Key Takeaway: Tax treatment is identical for ETFs and mutual funds within each category—so your choice won’t affect taxes, only your holding horizon and redemption timing.
4. Liquidity & Flexibility
| Feature | ETFs | Mutual Funds |
| Trading Hours | Intraday (9:15 AM–3:30 PM) | Once per day (close‑of‑day NAV) |
| Minimum Investment | 1 share (₹500–₹1,000 typically) | As low as ₹100 per SIP; ₹500–₹1,000 lump sum |
| Liquidity | Depends on trading volume; higher AUM ETFs trade tighter bid‑ask spreads . | Always redeemable from issuer at NAV |
| Transparency | Holdings published daily | Holdings disclosed fortnightly or monthly |
ETFs suit active traders and those wanting precise entry/exit.- Mutual Funds are ideal for hands‑off, systematic investing via SIPs.
5. Performance & Tracking Error
- ETFs: Aim to track benchmarks closely, but can deviate by 0.05%–0.20% p.a. (tracking error).
- Index Mutual Funds: Similar tracking error, often slightly higher due to fund size and cash drag.
- Active Mutual Funds: Potential to outperform benchmarks but at the cost of higher fees; only a minority consistently beat their peers over 5+ year periods.
6. Where Each Shines: Use Cases
6.1 When to Choose ETFs
- Cost-Sensitive Investors: Expense ratios under 0.1% matter over decades.
- Tactical Trades: Rebalancing your asset mix intraday.
- Access to Niche Segments: Commodity ETFs (gold, oil) or sectoral indices with liquidity.
6.2 When to Choose Mutual Funds
- Systematic Investors: Automated SIPs with auto‑debit facilities.
- Active Management Fans: Belief that managers can weather volatile markets.
- Smaller Ticket Sizes: SIPs from ₹100/month avoid brokerage overhead.
7. The 2025 Market Context
- ETF Popularity: ETFs saw their 54th consecutive month of net inflows in April, highlighting growing retail trust in passive strategies .
- Mutual Fund Resilience: Despite some equity outflows, SIP contributions hit a record ₹26,688 crore in May, underscoring disciplined investing.
- Gold’s Role: Gold ETFs’ AUM jumped 27% in Gujarat from January to April, as investors hedge geopolitical risks and inflation .
These trends show both ETFs and mutual funds thriving—your choice depends on style, horizon, and cost priorities.
8. Practical Steps to Invest
8.1 Investing in ETFs
- Open a Demat & Trading Account: With any broker (e.g., Zerodha, Upstox).
- Search the ETF Symbol: For instance, NIFTY BEES (a Nifty 50 ETF) or BHARAT Bond ETF.
- Place an Order: At market or limit price during trading hours.
- Monitor Your Holdings: Use your broker’s portfolio tracker.
8.2 Investing in Mutual Funds
- Use an AMFI‑Registered Platform: CAMS, KFintech, or apps like Groww, Zerodha Coin.
- Select Direct Plans for Lower Fees: Enter the “direct” option.
- Set Up a SIP or Lump Sum: Choose amount and date; auto‑debit saves time.
- Track via NAV or App Dashboard: No intraday volatility to worry about.
9. How to Pick the Right Fund or ETF
| Criterion | ETFs | Mutual Funds |
| AUM & Liquidity | AUM > ₹1,000 crore, tight spreads | AUM > ₹500 crore, steady SIP inflows |
| Expense Ratio | Lowest available | Compare direct vs regular plans |
| Tracking Error (Passive) | < 0.2% p.a. | < 0.3% p.a. |
| Fund House Reputation | AMFI‐registered, active market maker support | Consistent performance & risk metrics |
| Tax & Holding Period | Match your investment horizon | Same category tax rules apply |
10. Common Pitfalls to Avoid
- Overtrading ETFs: Frequent buys/sells rack up brokerage.
- Chasing Hot Managers: Recent top mutual fund performance may not repeat.
- Ignoring Bid‑Ask Spread: A 0.5% spread erases several years of expense savings.
- Neglecting Portfolio Fit: Both tools must align with your overall asset allocation.
Conclusion
In 2025, ETFs and mutual funds each have distinct strengths:
- ETFs for cost‑conscious, flexible, intraday access to indices and niche exposures.
- Mutual Funds for disciplined SIPs, active management, and small ticket investing.
Both saw blockbuster inflows—₹19,056 crore into ETFs in April and a record ₹26,688 crore SIP run in May—reflecting investor enthusiasm. Ultimately, your choice hinges on:
- Investment Horizon: Short‑term trading or long‑term wealth building?
- Cost Sensitivity: Does a 1% vs. 0.1% fee make a difference over 10 years?
- Convenience Needs: Intraday flexibility or hands‑off SIP automation?
By weighing these factors—and using the step‑by‑step guides above—you can confidently allocate the right mix of ETFs and mutual funds to reach your 2025 goals and beyond.
Source : thepumumedia.com