ETFs Vs Mutual Funds: Which Is Better For Short-Term & Long-Term Investments?
- Share. Market
- 7 min read
- 18 Jun 2025
An Exchange-Traded Fund (ETF) tracks an index or a basket of commodities, stocks, bonds, and other securities. A Mutual Fund (MF) is a financial instrument that pools the investor-raised capital into stocks, bonds, and other securities.
Although both these investment choices are generally considered safer than trading shares directly, the returns you get still depend on how the individual investments are doing in the market. In simple words, both are connected to market performance and their returns are influenced by market ups and downs.
Lets look at the differences between ETFs and MFs in detail.
Difference Between ETF & Mutual Fund: Comparison Table
Instead of directly investing in the stock market, investors can see ETFs and MFs as an indirect way of investing. Yet, you must study the underlying differences between ETFs and MFs to understand which aligns better with their investment goals and strategies.
Go through the comparison table showcasing ETF vs Mutual Fund below and see which is the better investment option for you:
| Basis of Comparison | ETF | MFs |
| Ease of Trading | ETFs can be traded during a trading session just like any other stock. | Investors can purchase or sell the open-ended MFs at their ongoing Net Asset Value (NAV). The NAV price is calculated based on how the underlying securities of an MF perform. |
| Liquidity Options | ETFs offer more liquidity options as they allow the buying and selling of ETF units (shares) during the trading session. | Open-ended MFs offer easy liquidity alternatives but can be traded only once the trading session completes. Investing in a close-ended mutual fund is not possible after the end of a New Fund Offer (NFO) subscription period. Also, withdrawing the accrued gains is not possible until the maturity date. |
| Expenses | As ETFs fall in the category of passive funds, you don’t have to spend much on their management. | Some MFs are actively managed by professional teams because their only goal is to outperform the market. So, their expense ratios will be higher than an ETF. |
| Associated Risks | ETFs track a particular index, which would mean that it would be more diversified. | To manage the risk and enhance returns, fund managers actively reallocate capital, reducing exposure to underperforming stocks and increasing investments in better-performing ones. |
| Capital Required | As ETF units are available for buying just like a stock, investors can buy even one unit at the ETF’s ongoing market price. | A lump sum amount can be invested in MFs. However, with the option of Systematic Investment Plan (SIP), investors can invest in them with a relatively smaller amount. |
| Taxation | For Equity ETFs, gains within 1 year are taxed at 20%. After 1 year, gains above ₹1.25 lakh are taxed at 12.5%. Debt and international ETFs are taxed at your income tax slab rate, with no indexation benefit. | The Equity MFs follow the same tax rules as equity ETFs. Debt MFs are also taxed at your income slab rate, with no indexation benefit for investments made after April 1, 2023. |
| Diversification | ETFs mirror a specific index. So, they are more target-oriented investments. | MFs invest in a broad range of securities allowing more diversification options to the investor. |
ETF v/s Mutual Fund: Which Is The Better Option For Investors?
ETFs generally target a broad index (e.g., Nifty 50) or focus on sectors like metal, banking, IT, or others.
Investors can capitalise on short-term index movements of an ETF with intraday trading. Also, since they are not actively managed by a fund manager, they are lower-expense investments.
ETFs aim to mirror a market index rather than outperform it, which keeps their fund management costs lower. While both ETFs and mutual funds follow the same tax rules in India, ETFs may appeal to cost-conscious investors due to their lower expense ratios.
MFs are more suitable for wealth generation. With a well-strategised mutual fund scheme and a skilled fund manager, investors may make surplus gains over the long term.
MFs are also ideal for those who prefer goal-based investments for specific objectives such as retirement planning, buying a house, etc. Investors with a conservative mindset can choose mutual fund schemes that focus largely on debt or hybrid funds.
Those who don’t want to invest in bulk can start SIPs to generate significant wealth without affecting their financial health. Use an SIP calculator to learn how SIPs simplify mutual fund investments.
ETF Vs Mutual Fund: Growth & Performance-Related Comparison
With ETFs, you can gain a wide exposure to several stocks belonging to the same sector. For instance, CPSE ETF and other ETFs that target public sector companies, investors can trade for short-term gains or stay invested for long-term ETF returns.
You can also gain a similar advantage with PSU MFs. So, consider checking the expense ratios and other operating costs associated with both ETFs and MFs before making a financial decision.
ETFs offer flexibility when it comes to investing and redeeming gains. Investors can easily purchase and sell ETF units with their trading account.
If you haven’t opened a trading account yet, click here and get access to a free trading account.
MFs also have been performing equally well. By investing in MFs from credible AMCs, investors may generate surplus wealth to meet their future financial goals.
Consider These Things While Choosing Between ETFs and MFs
Thinking about which one to choose after understanding the difference between ETF and MF? Go through the following checklist before making a decision:
1. Investment Strategies & Goals
Both ETFs and mutual funds can assist you in investing in broad market indices or specific sectors depending on your strategy. If you prefer low-cost, passive investing that essentially tracks an index, ETFs may align with your approach. Conversely, if you desire professional fund management, diversified options, and goal-based options such as SIPs, mutual funds offer greater flexibility.
2. Investment Costs
ETFs require lower operational and management costs. On the other hand, the ER of MFs is usually on the higher side.
In a nutshell, investors prefer ETFs over MFs when it comes to earning through short-term investment strategies. Those looking to gain from long-term capital appreciation through goal-oriented investment strategies can invest in MFs.
Final Thoughts
An ETF is a flexible, and affordable option if you are aiming at short-term or long-term gains with minimum investment. MFs are suitable for long-term gains and goal-based investments.
Want to analyse different market-linked instruments such as bonds, ETFs, and MFs at the same time? Check the official website of Share.Market to develop a nuanced approach for investments!
FAQs
No, SIPs do not help in minimising the expense ratio associated with MFs. It is a fee charged by the fund manager to manage the operating, research, and fund management costs of a mutual fund.
Yes, ETFs are open-ended funds that allow investors to withdraw their assets whenever they want!
Yes, many ETFs pay dividends, similar to stocks or mutual funds, if the underlying securities in their portfolio generate income. These dividends are typically added to your annual income and taxed as per your applicable income tax slab rate in India. A 10% TDS (Tax Deducted at Source) may be applicable if the dividend amount exceeds ₹5,000 in a financial year.
ETFs offer intraday liquidity, meaning you can buy and sell units throughout the trading day at live market prices, allowing quick entry or exit from positions. This is similar to stock trading.
Mutual funds offer end-of-day liquidity. You place an order to buy or sell, but the transaction is processed only after the market closes at the day’s calculated Net Asset Value (NAV). You cannot trade them throughout the day.
Yes. Many investors use a combination of ETFs and Mutual Funds to create a well-diversified portfolio. For example, you might use low-cost index ETFs for broad market exposure and passively tracking a benchmark, while also investing in actively managed mutual funds for specific sectors, themes, or to potentially generate alpha (returns above the market) with expert fund management.
