ETF vs Mutual Fund: What's the Difference?

Short answer: An ETF trades on the stock exchange like a share at live prices and usually tracks an index at very low cost, while a traditional mutual fund is bought and sold at the end-of-day NAV directly through the fund house.

How They Trade

An Exchange Traded Fund is listed on the stock exchange, so you buy and sell it through a demat and trading account at prices that move during market hours. A conventional mutual fund unit is transacted with the fund house at a single end-of-day NAV, with no intraday price and no demat account needed.

Cost and Structure

Most ETFs are passive, tracking an index, and tend to have very low expense ratios. Traditional funds include both low-cost index funds and pricier active funds. ETFs can be cheaper to own, but you may pay brokerage and face a bid-ask spread when trading them, which a direct fund purchase avoids.

Liquidity and Convenience

ETFs need a buyer on the exchange, so thinly-traded ETFs can have wide spreads and prices that drift from their underlying value. Regular mutual funds always transact at NAV regardless of how many others are trading, which is more convenient for SIPs and for investors without trading accounts.

SIPs and Automation

Traditional mutual funds make automated monthly SIPs effortless. Doing the equivalent with ETFs is clunkier since each purchase is a market trade. For disciplined, automated investing, an index fund is often simpler than an equivalent ETF, even if the ETF's headline cost is lower.

Which to Choose

If you already trade on the exchange, want intraday flexibility and the lowest cost, ETFs are attractive. If you want simple, automated, SIP-friendly investing without a demat account, a low-cost index fund delivers nearly the same exposure with less hassle. Both are good ways to own the market cheaply.

Sources: SEBI Investor Education

This explainer was written by The Dispatch desk to answer a question readers commonly ask. It is general information, not personalised financial advice.