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Investing

ETF vs Mutual Fund: How Buying, Costs and Liquidity Differ

An ETF trades on the exchange at live prices through a demat account; a mutual fund is bought from the AMC at the day's NAV.

PN

Written by Priya Nair

Published 18 October 2026·7 min read

On this page9 sections
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An ETF is bought and sold on the stock exchange at live prices through a demat and trading account. A regular mutual fund is bought from the fund house or an investment platform at the NAV declared at the end of the day. Both are mutual fund schemes under SEBI rules, and equity versions of both are taxed the same way.

Key differences at a glance

Feature ETF Mutual fund (including index fund)
Where you buy Stock exchange, through a broker AMC, distributor or investment platform
Account needed Demat and trading account (units must be held in demat) No demat needed; a folio with the AMC is enough
Price you get Market price at the moment of the trade That day’s NAV if money reaches the fund before 3 pm on a business day
Fractional units No; whole units only Yes
Costs Expense ratio, brokerage, demat charges, bid-ask spread Expense ratio; exit load in some schemes
Expense cap 0.90% for ETFs and index funds under the SEBI (Mutual Funds) Regulations, 2026 Higher caps for active funds
Selling Sell on the exchange any time during market hours Redeem with the AMC at the applicable NAV

For a basic explanation of how ETFs are built, see our guide What is an ETF. This page compares the two ways of holding a fund.

Buying: exchange vs fund house

AMFI describes an ETF as a fund that “trades like a common stock on a stock exchange”, with units held compulsorily in demat form. You need a demat and trading account, and you place a buy order through your broker just as you would for a share.

You cannot usually buy ETF units straight from the fund house. ETF scheme documents let market makers deal directly with the AMC in creation-unit lots, and large investors only for amounts above ₹25 crore. One exception helps small investors. If an ETF trades at a discount of more than 1% to NAV for 7 trading days in a row, or has no quotes for 3 trading days, you may redeem directly with the AMC without exit load.

A mutual fund is bought from the AMC’s website, a registered distributor, or a platform, and held in a folio. A demat account is optional.

Steps to buy an ETF

  1. Open a demat and trading account with a SEBI-registered broker, if you do not have one.
  2. Search for the ETF by its exchange symbol and check its traded volume.
  3. Compare the market price with the ETF’s iNAV, which the fund house publishes during trading hours.
  4. Place a limit order for the number of whole units you want.
  5. Check the contract note; the units reach your demat account after settlement.

Pricing: live price vs end-of-day NAV

An ETF’s price moves through the day with trading. Because the price is set by buyers and sellers, it can sit above or below the value of the fund’s holdings. The fund house discloses an indicative NAV (iNAV) on the exchange continuously during trading hours so you can compare.

A mutual fund has one price a day. Under the rules in force since 1 February 2021, you get the NAV of the business day on which your money reaches the fund’s bank account before the 3 pm cut-off. Money that arrives later gets the next business day’s NAV. This applies to lump sums and SIPs alike.

SEBI’s circular of 15 June 2026 also changed ETF trading rules from 7 September 2026. Equity and most debt ETFs now start with a price band of ±10% around a base price, which can widen to ±20%. Liquid and overnight ETFs have a fixed ±5% band.

Costs: expense ratio, brokerage and spread

Both products charge an annual expense ratio, taken from the fund’s assets. Under the SEBI (Mutual Funds) Regulations, 2026, in force from 1 April 2026, the base expense limit for index funds and ETFs is 0.90% a year. On ₹1,00,000, that cap works out to at most ₹900 a year; the actual ratio of each scheme is in its factsheet.

ETFs carry extra costs that a mutual fund does not. You pay brokerage and statutory charges on each trade, demat account charges, and the bid-ask spread, the gap between the best buying and selling prices. In a thinly traded ETF, the spread can cost more than the difference in expense ratio. SEBI’s investor site lists brokerage and demat charges as costs to weigh.

A mutual fund has no trading costs, but some schemes charge an exit load if you redeem within a set period. Check the scheme’s key information memorandum.

SIPs, minimums and liquidity

ItemDetails
SIPmutual funds offer SIPs directly, in fixed rupee amounts. With an ETF, you buy whole units, so a fixed monthly amount rarely buys an exact number of units. Some brokers offer a repeat-purchase facility for ETFs; check yours.
Minimuman ETF’s minimum is the price of one unit. A mutual fund’s minimum is set by each scheme.
LiquiditySEBI’s investor site notes that ETFs generally have higher daily liquidity, but that depends on trading volume in the specific ETF. Mutual fund redemptions are paid by the AMC, so you do not need a buyer.

You can plan a monthly amount with the SIP calculator.

Tax treatment

Tax depends on what the fund holds, not on whether it is an ETF or a regular fund.

  • Equity ETFs and equity funds: gains on units held up to 12 months are taxed at 20%. Longer-held gains are taxed at 12.5% above ₹1.25 lakh a year, under the rates set by the Finance (No. 2) Act, 2024.
  • Debt-heavy funds: from AY 2026-27, a “specified mutual fund” means one that invests more than 65% in debt and money market instruments. Gains on such units bought on or after 1 April 2023 are taxed at your slab rate whatever the holding period. The old test caught any fund with 35% or less in equity, including gold ETFs and gold funds; the new test does not. A debt ETF above the 65% line is still covered.

Our page on mutual fund taxation covers the rules in full. For gold specifically, see gold ETF vs gold mutual fund.

Index fund vs ETF tracking the same index

A Nifty 50 index fund and a Nifty 50 ETF hold the same shares. The practical differences are the ones above:

  • Choose the index fund if you want SIPs in round amounts, no demat account and no trading decisions.
  • Choose the ETF if you already trade, want to buy or sell at a known price during the day, and the ETF trades in enough volume to keep the spread small.

In both, compare the expense ratio and the tracking error, which shows how far the fund’s return strays from the index.

Frequently asked questions

Is an ETF a mutual fund?

Yes. An ETF is a mutual fund scheme whose units are listed and traded on a stock exchange.

Do I need a demat account to buy an ETF?

Yes. ETF units must be held in demat form, and you buy them through a trading account.

Which is cheaper, an ETF or an index fund?

ETFs often have lower expense ratios, but you also pay brokerage, demat charges and the bid-ask spread. Compare the total cost for the amount and holding period you plan.

Can I buy an ETF directly from the AMC?

Only market makers, in creation-unit lots, and large investors, for amounts above ₹25 crore. Other investors buy and sell on the exchange, except in the low-liquidity cases set out in the scheme document.

Are ETFs and mutual funds taxed differently?

No. Tax depends on the fund’s holdings. Equity ETFs and equity mutual funds follow the same capital gains rules.

Can I start a SIP in an ETF?

Not directly with the AMC. Some brokers let you set up regular ETF purchases, but you buy whole units at market price.

Sources

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