ETF vs Mutual Fund in India: Cost, Tax and Which to Pick

For tracking an index like the Nifty 50, an ETF usually costs less each year than an index mutual fund, but a mutual fund is easier to run as an automatic SIP and needs no demat account. Tax is the same for both when they hold Indian equity, so the choice comes down to cost, convenience and how you plan to invest.

This guide compares the two on expense ratio, tracking error, liquidity and iNAV, bid-ask spreads, SIP convenience, account requirements and tax. It includes a 15-year cost comparison worked out in rupees and a decision table at the end.

How each one works

A mutual fund pools money and issues units at the day’s net asset value (NAV), calculated once after the market closes. You buy from and sell back to the fund house, directly or through a platform. For equity schemes, the NAV you get depends on the 3 pm cut-off and when your money reaches the fund.

An exchange-traded fund (ETF) is also a mutual fund scheme, but its units are listed on the stock exchange. You buy and sell them through a broker during market hours at the market price, which moves through the day. Since 1 May 2023, SEBI rules allow investors to deal directly with the fund house in ETF units only for transactions above ₹25 crore. Everyone else uses the exchange.

This article compares like with like: an index ETF against an index mutual fund tracking the same index. Comparing an ETF with an actively managed fund mixes two questions, passive against active and ETF against fund. Our piece on the benefits of ETF investing covers the wider case for passive funds.

Cost: expense ratio (TER)

The total expense ratio (TER) is the yearly fee taken out of the fund’s assets. It is deducted daily from the NAV, so you never see a bill. Large Nifty 50 ETFs often charge some of the lowest TERs available, and direct plans of index funds are usually a little higher.

Two examples, given for comparison only and not as recommendations: Nippon India ETF Nifty 50 BeES showed a TER of 0.04% (Tickertape, as of October 2026), and UTI Nifty 50 Index Fund Direct Growth showed 0.25% (Groww, as of October 2026). Regular plans of index funds cost more than direct plans, because they include distributor commission.

From 1 April 2026, SEBI’s new mutual fund rules split fees into a base expense ratio (BER), which is the fund house’s own fee, plus brokerage and statutory levies charged at actuals. The BER cap for index funds and ETFs is 0.90% of daily net assets, down from the earlier 1% TER cap. Most large index products charge well below the cap, so compare the actual figure on the factsheet.

ETFs add costs that a TER does not show: brokerage, the bid-ask spread (explained below) and demat charges. For a lump sum held for years, these are small. For many small monthly purchases, they can eat into the TER advantage.

Tracking error and tracking difference

Tracking difference is how far the fund’s return falls behind the index over a period, for example one year. It is mostly the TER plus cash drag and trading costs. This is the number that hits your returns.

Tracking error measures how much the fund’s daily returns wander from the index. SEBI defines it as the annualised standard deviation of the difference in daily returns over the past year. Equity ETFs and index funds must keep it within 2%, and fund houses publish it daily on their websites and on AMFI. Lower is better, and a large, cheap Nifty 50 fund typically shows very low figures.

Remember one more point for ETFs: the tracking error is measured on the NAV. What you actually earn depends on the market price you buy and sell at, which can differ from the NAV.

Liquidity, iNAV and the bid-ask spread

A mutual fund always buys back your units at NAV, so you never need a buyer. An ETF needs a buyer on the exchange. Fund houses appoint market makers to quote prices, but how easily you can trade, and at what price, varies widely between ETFs.

iNAV (indicative NAV) is the estimated value of one ETF unit based on live prices of the underlying stocks. SEBI requires equity ETFs to publish it with a lag of no more than 15 seconds. Compare the market price with the iNAV before you trade. If you pay much more than the iNAV, you are buying at a premium. If you sell well below it, you are selling at a discount.

The bid-ask spread is the gap between the best price a buyer is offering (bid) and the lowest price a seller will accept (ask). You lose roughly this gap on each round trip. Heavily traded Nifty 50 ETFs usually have tight spreads. Small sector, thematic or international ETFs can trade with wide spreads and noticeable premiums, especially at the open and close.

• Use limit orders, not market orders.
• Avoid the first and last 15 minutes of the session.
• Check average daily traded value and the iNAV on the fund house or exchange website.
• If an ETF regularly trades far from its iNAV, an index fund on the same index may be the cheaper option in practice.

SIP convenience and account requirements

Mutual funds are built for SIPs. You set up an auto-debit once, units are allotted in fractions, and many index funds accept SIPs from ₹500 a month (UTI Nifty 50 Index Fund Direct, per Groww, as of October 2026). You can hold units through the fund house, an RTA account (CAMS or KFintech) or MF Central, with no demat account.

ETFs need a demat and trading account. You buy whole units at the market price, so a fixed rupee amount rarely buys an exact number of units. Many brokers now offer ETF SIPs that place a buy order on a set date, but you still pay brokerage and spread on each purchase, and some charge an annual maintenance fee for the demat account.

If you plan a monthly SIP, our SIP calculator shows how the amount grows over different periods.

Tax: the same equity rules

An equity ETF and an equity index fund (at least 65% in Indian shares) are taxed identically. Units held for 12 months or less are short-term, taxed at 20%. Units held longer are long-term, taxed at 12.5% on gains above ₹1.25 lakh a financial year, without indexation. These rates have applied since 23 July 2024 and continued unchanged in Budget 2026 and under the Income-tax Act, 2025. STT of 0.001% applies on sale for both.

Neither format lets you switch between schemes without tax. In a mutual fund, a switch counts as a sale. In an ETF, you sell one and buy another. Gold, silver, international and debt ETFs and funds follow different rules, so check before assuming equity treatment. Our guide on reducing capital gains tax on shares explains harvesting and loss set-off, which work the same way for both.

Worked example: 15-year cost comparison

Assumptions (all hypothetical): the index earns 12% a year before costs. The ETF’s TER is 0.05%, and each purchase and the final sale cost 0.1% in spread, brokerage and charges. The index fund (direct plan) has a TER of 0.25% and no trading costs. For context, we add an actively managed regular plan at 1.5% TER, assuming it only matches the index before costs. Stamp duty and tax are left out, because both are the same for every option.

Lump sum of ₹10 lakh for 15 years

• ETF: ₹10,00,000 less 0.1% entry cost = ₹9,99,000. Net return 12% − 0.05% = 11.95%. Growth factor 1.1195^15 = 5.437027. Value ₹9,99,000 × 5.437027 = ₹54,31,590. Less 0.1% exit cost = ₹54,26,158.
• Index fund: net return 11.75%. 1.1175^15 = 5.293135. Value ₹10,00,000 × 5.293135 = ₹52,93,135.
• Active regular plan: net return 10.5%. 1.105^15 = 4.471304. Value ₹10,00,000 × 4.471304 = ₹44,71,304.

The ETF ends ₹1,33,023 ahead of the index fund, even after paying trading costs twice. The gap to the regular plan is ₹9,54,854, which shows that the plan type and fund style matter more than the ETF-or-fund choice. Our lumpsum calculator lets you try your own numbers.

SIP of ₹10,000 a month for 15 years

Here each yearly net return is converted to a monthly rate, (1 + annual rate)^(1/12) − 1, and each instalment is invested at the start of the month. That gives 0.9451% a month for the ETF, 0.9301% for the index fund and 0.8355% for the regular plan. In the ETF, each ₹10,000 instalment loses 0.1% to trading costs, and the final value loses another 0.1% on sale. Total invested in each case: ₹18 lakh.

Option	Annual cost assumed	₹10 lakh lump sum after 15 years	₹10,000/month SIP after 15 years
Index ETF	0.05% TER + 0.1% per trade	₹54,26,158	₹47,29,552
Index fund, direct plan	0.25% TER	₹52,93,135	₹46,58,797
Active fund, regular plan (matches index before costs)	1.5% TER	₹44,71,304	₹41,89,398

In the SIP case, the ETF’s lead shrinks to ₹70,755, because it pays trading costs on 180 separate purchases. If your broker charges a flat fee per order, or the ETF has a wider spread, that gap narrows further. The longer the period, the more compounding magnifies even a 0.2% difference in yearly cost.

Side-by-side summary

Factor	Index ETF	Index mutual fund
Where you buy	Stock exchange, through a broker	Fund house, RTA or platform
Price	Market price, live during trading hours	End-of-day NAV
Expense ratio	Usually lowest	Slightly higher (direct plan)
Extra costs	Brokerage, spread, demat charges	Usually none; check exit load
Liquidity	Depends on exchange volume and market makers	Fund always redeems at NAV
Premium or discount risk	Yes; check iNAV	No
SIP	Possible via broker; whole units	Automatic; fractional units
Demat account	Required	Not required
Tax (equity)	Same: 20% STCG; 12.5% LTCG above ₹1.25 lakh; 12-month holding period

Which should you choose? A decision table

If this describes you	Better fit	Why
No demat account and no plan to open one	Index fund	No account needed; buy direct from the fund house
Small monthly SIP you want fully automatic	Index fund	Auto-debit, fractional units, no per-order costs
Investing a large lump sum to hold for years	ETF	Lower TER; trading costs paid only once at entry and exit
Already active on a broker with low or zero delivery brokerage	ETF	Extra costs are small, TER saving remains
Want a niche index whose ETF trades thinly	Index fund (if one exists)	Avoids wide spreads and premiums
Need to buy or sell at a specific price during the day	ETF	Live pricing and limit orders
Prone to tinkering when markets move	Index fund	Less temptation to trade on screen

Many investors use both: an index fund SIP for monthly savings and an ETF for occasional lump sums. Whichever you choose, the larger decision is how much goes into equity, debt and other assets, which our guide to asset allocation covers.

Common mistakes

• Choosing an ETF on TER alone, then buying a thinly traded one at a premium that wipes out years of fee savings.
• Placing market orders at the open, when spreads are widest.
• Buying the regular plan of an index fund when a direct plan is available.
• Comparing an ETF’s TER with an active fund’s past returns. Compare like with like on the same index.
• Assuming gold or international ETFs get equity tax treatment.

FAQ

Is an ETF better than a mutual fund for beginners?

Not necessarily. An index fund SIP is simpler: no demat account, automatic investing and no need to watch prices. An ETF makes more sense once you already use a broker and invest in larger amounts.

Can I do a SIP in an ETF?

Yes, many brokers let you schedule recurring ETF purchases. You buy whole units at the market price and pay brokerage and spread on each order. It is less tidy than a mutual fund SIP, which allots fractional units at NAV.

Are ETFs and index funds taxed differently?

No, not when they hold Indian equity. Both pay 20% on gains within 12 months and 12.5% on long-term gains above ₹1.25 lakh a year. Non-equity ETFs and funds, such as gold or international, follow other rules.

What is iNAV and why does it matter?

iNAV is the live estimated value of an ETF unit, updated within 15 seconds for equity ETFs. Comparing it with the market price tells you whether you are paying a premium or selling at a discount. Large gaps are a warning sign for that ETF’s liquidity.

What is a good tracking error for an index fund or ETF?

Lower is better. SEBI caps it at 2% for equity index funds and ETFs, but large Nifty 50 products usually report far less. Also look at tracking difference, which shows how much return you actually gave up against the index.