Mutual Funds Vs ETFs

Updated on May 31, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

What are the differences Between Mutual Fund and ETF?

Both mutual funds and exchange-traded funds are pooled investment instruments. While mutual funds are managed actively, ETFs are managed passively. Mutual funds are handled by professionals, whereas ETFs replicate an underlying securities index.

Mutual funds have a minimum investment requirement. They are sold or purchased directly from mutual fund companies. The purchase and sale of ETFs, on the other hand, are channelized through brokers. ETFs are traded in the secondary markets and have no minimum investment limit.


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Comparative table – Mutual Funds Vs ETFs

Mutual funds vs ETFs, head to head comparison is as follows:

BasisMutual FundsETFs (Exchange Traded Funds)
MeaningInvestors’ funds are handled professionally and put into various securities, bonds, and equityThis investment product replicates the performance of an underlying index—securities, stocks, gold, bonds, etc
ManagementActively managedPassively managed
Security TypeEquity, bonds, money market funds, and short-term debtsEquity, commodity, bonds, gold, and currency
StructureComplexLess Complex
Expense RatioUsually between 1.5% to 2.25%As low as 0.25%
Trading AccountRequiredNot required
Trading StyleNo short selling or margin tradingShort selling and margin trading
Trading RestrictionsYesNo
Trading ProcessExchanged through mutual fund companiesBrokers trade it in the secondary market, just like other stocks
Minimum InvestmentApplicableNot Applicable; a single unit can also be purchased
Fees or ChargesBrokerage fees, sales commission, operational fees, and redemption fees are applicableCommission on each transaction
Automatic Withdrawal and InvestmentPossible through systematic investment plans (SIPs)Not Possible
PricingPriced at the end of trading dayReal-time pricing
TaxesTax charged separately on capital gains from the sale of mutual fundsCapital gains get added to personal income
Tax EfficiencyLowHigh

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What are Mutual Funds?

Mutual fund managers actively manage investments. Mutual fund houses collect money from various small investors—the accumulated sum is bundled into diversified securities, stocks, commodities, bonds, money market instruments, and short-term debts.

Mutual fund companies uniformly divide overall investment into small units. Then, depending on the contribution, investments are proportionately allotted to each investor. The funds are further classified into open-ended mutual funds and closed-ended mutual funds.

What are ETFs?

An Exchange Traded Fund (ETF) refers to a passively managed basket of asset stock exchange like equity. It includes assets, security commodities, currency, stocks, and bonds. It is available for short selling and margin trading. This is done in the secondary market.

Mutual Funds vs. ETFs Infographics

Let us look at the Mutual Funds vs ETFs infographic for a better understanding.


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Let us look at some mutual funds vs ETFs similarities. Both are similar investment schemes that put the investors’ funds into a securities bundle. They offer similar returns and risks which depend on the underlying securities basket.

Moreover, these investment vehicles are governed by the Securities and Exchange Act, 1934; Securities Act, 1933; and the Investment Company Act, 1940.

Key Differences

Now, let us discuss mutual funds vs ETFs differences in detail:

  1. Mutual funds are accumulated from various investors. On the other hand, an ETF is traded on the stock exchange.
  2. Mutual funds are managed actively. ETFs function passively—by tracking the performance of the underlying securities index.
  3. Mutual funds are purchased directly from a company; Investors exchange ETFs in the secondary market by employing a broker.
  4. The trading structure of mutual funds is more complicated than the ETFs. Mutual funds require a trading account. They are restricted from frequent buying and selling.
  5. Mutual funds have a higher expense ratio, ranging between 1.5% and 2.25%—ETFs have an expense ratio of 0.25%.
  6. Most mutual funds have a minimum investment limit. In contrast, an investor can even buy a single unit of ETF.
  7. Mutual funds involve fees for brokerage, sales commission, operation, and redemption. ETFs only require a broker’s commission on transactions.
  8. Investors can acquire mutual funds through SIPs, where a certain sum is automatically withdrawn from the investor’s account and invested in the desired scheme. ETFs do not provide such a facility.
  9. The current price of a mutual fund is determined at the end of the trading day. ETFs are subject to real-time pricing.
  10. ETFs are more efficient when it comes to taxes. Gains from mutual fund sales are taxed separately, whereas ETF sales just get added to the individual’s taxable income.

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