Difference Between ETF and Mutual Fund
The main difference between an ETF and a mutual fund is where you buy it. A mutual fund is bought from the asset management company at one price a day. An exchange traded fund is bought from another investor on a stock exchange, at a price that keeps moving. That single change brings a demat account, brokerage, and a price that can sit above or below the fund’s own net asset value. An earlier version of this page treated the market price and the NAV as the same number. They are not.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and Specialised Investment Fund distributor, ARN-194216, and a distributor of portfolio management services registered with APMI, APRN10201. We are not registered investment advisers. This page names no scheme and no fund house. The choice is yours.
- Where units come from: the AMC for a mutual fund, the exchange for an ETF
- Price: one NAV a day for a mutual fund, a moving market price for an ETF
- Demat account: not needed for a mutual fund, needed for an ETF
- Costs: expense ratio for both, plus brokerage and the bid-ask spread for an ETF
- Tracking rule: an index fund or ETF holds at least 95% of total assets in the index it tracks
- Market makers: an AMC must appoint at least two for each ETF
- Tax: follows what the scheme holds, not whether it is listed
Difference between an ETF and a mutual fund: where units come from
Purchase route is the first difference between an ETF and a mutual fund. Mutual fund units come from the asset management company at one price a day. ETF units come from another investor on a stock exchange, at a price that moves through the session, and a demat account is required to hold them.
Buying a mutual fund creates new units. The AMC takes the money, issues units and the scheme grows. Selling them back cancels units and the scheme shrinks. Only one price applies for the whole day, and it is the net asset value calculated after the market closes.
Buying an ETF does none of that. The units already exist and are sitting in somebody else’s demat account. The trade is matched on the exchange like a share trade, so the number of units in the scheme does not change. Order type, timing and the price on screen all work the way they do for shares.
That is why an ETF needs a broker and a demat account while a mutual fund does not. It is also why an ETF cannot be bought for a fixed rupee amount. Units trade whole, so ₹5,000 buys as many units as ₹5,000 covers at that moment, with the remainder left over.
| Feature | Mutual fund | ETF |
|---|---|---|
| Units come from | The AMC | Another investor on the exchange |
| Price | One NAV for the day | Market price, moving through the session |
| Demat account | Not required | Required |
| Broker | Not required | Required |
| Buying a fixed rupee amount | Possible | Not possible, units trade whole |
| SIP | Offered by the AMC | Through a broker, where supported |
| Charge on exit | Exit load, if the scheme has one | Brokerage and the bid-ask spread |
Why an ETF has two different prices
Market price and net asset value are two separate numbers for an ETF. NAV is what the holdings are worth per unit. Market price is what another investor will pay right now. Supply and demand on the exchange set the second one, so it can sit above or below the first.
When the market price is higher than NAV, the ETF trades at a premium. When it is lower, it trades at a discount. The gap is usually small for a heavily traded ETF and can widen for one that trades thinly, or during a sharp market move.
A mutual fund has no equivalent gap. Every subscription and redemption happens at NAV, so there is only one number to look at. Our page on net asset value sets out how NAV is calculated and when it applies.
This is the part the old version of this page got wrong. It described the creation and redemption process as keeping “the ETF’s price (NAV)” in line with its holdings. That wording merges two numbers that exist precisely because they can differ. The mechanism it describes is real, but what it does is keep the gap narrow, not make the two the same.
For gold and silver ETFs, SEBI requires indicative NAVs to be shown on the exchange platforms where the units are listed, on a continuous basis during trading hours. An investor can therefore compare the quoted price with the indicative value before placing an order.
What the 95 percent tracking rule mean
Index funds and ETFs must hold at least 95% of total assets in the securities of the index they track. The rule sits in paragraph 3.8.5 of the Securities and Exchange Board of India Master Circular for Mutual Funds dated 20 March 2026. It applies to the scheme whether it is listed or not.
The rule is why these schemes are described as passive. The manager is not selecting shares. The manager is holding the index in the index’s own proportions and adjusting when the index changes.
Tracking is never exact. Cash held for redemptions, trading costs when the index rebalances, and the timing of dividends all create a small gap between the index return and the scheme return. That gap is tracking error, and it exists for an index fund as much as for an ETF.
An index fund and an ETF can track the same index under the same rule. The difference between an ETF and a mutual fund tracking that index is the wrapper, not the portfolio. Our page on index funds covers the unlisted route in detail.
Cost: the difference between an ETF and a mutual fund on fees
Costs for an ETF come in three parts, not one. The expense ratio is charged inside the scheme, as with any mutual fund. Brokerage is charged by the broker on each trade. The bid-ask spread is the gap between the buying and selling price, paid on the way in and out.
Expense ratio. Deducted from the scheme’s assets and reflected in the NAV. Passive schemes generally run lower expense ratios than actively managed ones. Our page on expense ratio explains how the deduction works.
Brokerage. Charged per trade by the broker, along with exchange and statutory charges. A mutual fund bought from the AMC carries none of this. An investor who trades often pays it each time.
Bid-ask spread. The screen shows a price to buy and a lower price to sell. The difference is a cost even though no one invoices it. The spread is narrow on heavily traded ETFs and wider on thin ones, which is where the cost is easiest to miss.
Comparing an ETF with a mutual fund on expense ratio alone leaves two of the three out. Exit load works the other way: most ETFs have none, because the trade happens between investors, while a mutual fund may charge one. Our page on exit load sets out how that charge is applied.
Who keeps an ETF tradable
Market makers keep quotes on both sides of an ETF through the trading day. SEBI requires an AMC to appoint at least two of them for each ETF, under paragraph 4.5.1 of the March 2026 Master Circular. They are exchange members, and they deal with the AMC only in creation unit multiples.
Creation and redemption is the mechanism that keeps the market price near NAV. When the price runs above NAV, a market maker can create units and sell them, which adds supply. When the price falls below NAV, the reverse happens. The gap narrows because trading it is worthwhile.
SEBI’s rules also require AMCs to facilitate in-kind creation and redemption with market makers on a best-effort basis, and allow incentives for market makers within the scheme’s expense limit, linked to how well they provide liquidity.
None of this removes the gap. It narrows it. On a thinly traded ETF, or during a fast-moving session, the price on screen can still be some distance from the value of the holdings, which is why a limit order matters more here than it does when buying a mutual fund.
How ETFs are taxed
Tax on an ETF follows what the scheme holds, not the fact that it is listed. An equity ETF meeting the 65% test in Section 198(8) is taxed as an equity-oriented fund. A debt ETF falls under the specified mutual fund rule. Gold and silver ETFs meet neither test.
Equity ETFs. Where the 65% test is met, units sold within 12 months fall under Section 196 at 20%. Units sold after that fall under Section 198 at 12.5% on gains above ₹1,25,000 in a financial year. Both rates apply only where Securities Transaction Tax was paid on the sale, and a 4% health and education cess is added to the tax. Surcharge is a separate levy at higher incomes.
Example. Units bought for ₹4,00,000 are sold for ₹5,80,000 after 15 months. The gain is ₹1,80,000. After the ₹1,25,000 annual exemption, ₹55,000 is taxable. Tax at 12.5% is ₹6,875, cess at 4% is ₹275, and the total is ₹7,150. The example assumes an Indian resident with no other long-term gains that year, no surcharge, and STT paid.
Debt ETFs. Section 76 of the Income-tax Act 2025 treats gains on units of a specified mutual fund acquired on or after 1 April 2023 as short-term, whatever the holding period. A specified mutual fund is one investing more than 65% of its proceeds in debt and money market instruments. Gains are added to income and taxed at the investor’s slab rate, with no indexation.
We are not tax advisers. Confirm your own position with a chartered accountant. Our page on long term capital gain tax on mutual funds covers the computation in more detail.
What can go wrong
Risk in an ETF comes from the index it tracks and from the way it trades. Holdings fall when the index falls, exactly as the index does. The exchange price can also move away from the value of those holdings, and a thinly traded ETF is hard to sell well.
- Market risk. A passive scheme follows its index down as faithfully as it follows it up. Nothing in the structure limits a fall.
- Tracking error. The scheme return and the index return differ by a small margin. Cash balances, rebalancing costs and dividend timing all contribute.
- Liquidity and spread. Low traded volume widens the spread. Selling a large quantity can move the price against the seller.
- Concentration. An index weighted towards a few companies or one sector passes that concentration straight through to the holder.
Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.
Common Questions
Where the units come from. Mutual fund units are issued by the AMC at one NAV a day. ETF units are bought from another investor on a stock exchange at a moving market price, which requires a demat account and a broker.
Yes. ETF units are held in demat form and traded through a broker. Mutual fund units can be held without a demat account, directly with the AMC or through a distributor.
Not always. The expense ratio is usually lower, but an ETF also carries brokerage on each trade and the bid-ask spread on the exchange. Comparing expense ratios alone leaves out two of the three costs.
Yes. Market price is set by supply and demand on the exchange, so it can sit at a premium or a discount to NAV. Market makers narrow the gap but do not remove it.
Most do not, because the sale happens between investors on the exchange rather than with the AMC. Brokerage and the spread apply instead. A mutual fund may charge an exit load set out in its scheme document.
Tax follows what the scheme holds. An equity index fund and an equity ETF tracking the same index are taxed the same way. A gold ETF or a debt ETF is taxed differently, because it fails the equity test.
Returns, Form 16, Form 26AS and capital gain statements for at least six years after the end of the relevant tax year. Keep purchase records for anything you still hold for as long as you hold it. You will need the acquisition cost whenever you eventually sell.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.