ETFs vs. Mutual Funds: Understanding the Key Differences

When building an investment portfolio, many investors may consider pooled investment vehicles. Mutual funds and Exchange Traded Funds (ETFs) are considered as some of the  most popular options for investment. A mutual fund is a type of financial instrument where money is pooled from many investors to invest in securities like shares or bonds etc. An ETF is also a type of mutual fund scheme listed on the stock exchanges replicating or tracking an index.

While both offer diversification, their core mechanics, are quite different:

How ETFs Differ from Mutual Funds

While ETFs and mutual funds both offer a way to invest in a diversified basket of securities, they have several fundamental differences. The primary distinction lies in how they are traded and priced. Let’s take a look at a comprehensive comparison of both.

Trading and Pricing
ETFs are traded on stock exchanges throughout the day, just like individual stocks. Their price is determined by real-time supply and demand in the market. In contrast, mutual fund units are purchased or redeemed at the Net Asset Value (NAV), which is calculated once at the end of each trading day based on the closing prices of the underlying assets.

Account Requirements
To invest in ETFs, you must have a demat and trading account, as they are bought and sold on the stock exchange. Mutual funds can often be purchased directly from the Asset Management Company (AMC) or through various distributor platforms without requiring a demat account.

Unit Structure
A mutual fund’s value is represented by its daily NAV. An ETF unit, however, is often designed to represent a specific, measurable fraction of its underlying benchmark. For instance, a Nifty 50 ETF unit might be structured to be approximately 1/100th of the Nifty 50 index value. This direct linkage provides a clear, tangible reference for the ETF’s value during trading hours.

Cost and Transparency
ETFs, being passively managed, generally have lower expense ratios compared to managed mutual funds. Additionally, the portfolio holdings of an ETF are disclosed daily, offering a higher degree of transparency than mutual funds, which typically report their portfolios on a monthly or quarterly basis.

Conclusion

Choosing between ETFs and mutual funds depends on your investment style. ETFs offer real-time trading and generally lower costs, making them suitable for investors who want to trade at the flexibility of market hours. Mutual funds, priced at the end-of-day NAV, are a straightforward option, especially for those investing directly with an AMC. Both may be effective tools for building a diversified portfolio that aligns with your financial goals and risk appetite.

Disclaimer - Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully

Published on Nov 17th, 2025