Mutual Funds

• Pool money from multiple investors to create a diversified portfolio.
• Fund managers actively pick stocks or bonds aiming to outperform benchmarks or follow a strategy.
• Investors buy and sell units at the end of the trading day at the Net Asset Value (NAV).
• Provide SIP (Systematic Investment Plan) facility for disciplined investing.
• No demat account is needed.

ETFs (Exchange-Traded Funds)

An ETF (Exchange-Traded Fund) is a basket of securities (like stocks, bonds, or commodities) that tracks an index and is traded on a stock exchange just like a share. Think of it as a mutual fund you can buy and sell instantly on the stock market.

• Track specific indices or sectors passively.
• Trade on stock exchanges like individual stocks throughout market hours.
• Prices fluctuate based on supply and demand.
• Require a demat and trading account for transactions.
• Mostly passive, minimal active management or research involved.

Mutual Fund vs ETF:

Feature	Mutual Fund	ETF
Trading	Once per day at NAV (end of day)	Real-time trading like stocks during market hours
Pricing	Priced at daily NAV	Market price fluctuates throughout the day
Management	Actively or passively managed	Mostly passively managed (index tracking)
Account Required	Only fund account	Demat + trading account required
Minimum Investment	Typically Rs. 500–Rs. 1,000 with SIP options	Price of 1 ETF unit (varies with market)
Expense Ratio	Higher (0.5–2.5%)	Lower (0.05–1%)
Liquidity	High via fund house with end-of-day redemptions	Depends on trading volume; can be traded anytime during market hours

Cost Structure

Cost Type	Mutual Funds	ETFs
Expense Ratio	Higher due to active management and distribution fees	Lower, mostly passive with fewer overheads
Brokerage Fees	None (if purchased directly from AMC)	Brokerage and transaction fees apply with each trade
Exit Loads	May apply if redeemed before lock-in period	No exit load, but trading fees apply
Price Volatility	MFs are bought at NAV (calculated at mark to market value)	ETFs are bought at a premium or discount to NAV

Etf vs Mutual fund tax

• Both are taxed based on asset allocation (equity or debt classification).
• Equity-oriented (≥65% equity):
  • Short-Term Capital Gains (STCG): 20% (holding <12 months)
  • Long-Term Capital Gains (LTCG): 12.5% above Rs. 1.25 lakh exemption (holding >12 months)
• Debt-oriented (<65% equity): Gains taxed as per income tax slab for both STCG and LTCG.

Pros and Cons

	Mutual Funds	ETFs
Pros	Active management offers potential for outperformance. SIP facility helps small investors build discipline. No demat account required; easier for beginners. Suitable for investors who seek professional advice.	Lower expense ratios reduce investment costs. Can be traded intra-day like stocks. Transparent daily holdings. Tax-efficient due to fewer trades within the fund. Good for passive investors seeking market returns.
Cons	Higher costs erode net returns. Lack of real-time trading flexibility. Performance depends on fund manager skill. Portfolio disclosures are quarterly or monthly (less transparency).	Need demat and trading account. SIP facility is not naturally available (though some platforms offer systematic ETF purchases). Tracking errors may cause slight divergence from index. some times are traded at a premium to NAV.

Which one should you choose?

• Choose Mutual Funds if:
  • You want active management to potentially outperform the market.
  • You prefer easy SIP investments without maintaining a demat account.
  • You want professional fund management and advisory support.
  • You want to stability with the price (Especially no premiums to NAV)
• Choose ETFs if:
  • You prefer low-cost, passive investing.
  • Want the flexibility to trade anytime during market hours.
  • You have a demat account and are comfortable with stock market mechanisms.
  • Tax efficiency and transparency are priorities for you.

Summary: Both mutual funds and ETFs have distinct advantages. Mutual funds suit investors looking for active management and SIP convenience. ETFs appeal to cost-conscious, passive investors who want intraday trading flexibility. Many sophisticated investors hold both in a diversified strategy.

Regards,

Honvest Team.