ETFs vs. Mutual Funds: Understanding the Differences and Top ETFs to Consider in 2025
Investors often find themselves confused between Exchange-Traded Funds (ETFs) and mutual funds. While both are investment vehicles that pool money into a diversified portfolio of assets, there are key differences in how they function. In this blog, we’ll explore these differences and highlight some top ETFs to consider in 2025.
What is the Difference Between ETFs and Mutual Funds?
Mutual Funds: Actively Managed Investment
A mutual fund is a collection of stocks, bonds, or other assets managed by a professional fund manager. Here’s how it works:
- If you invest in a mutual fund that tracks the Nifty 50, the fund manager buys stocks in the same proportion as the index.
- For sector-specific mutual funds (e.g., pharma, logistics, financial services), the fund manager selects the best-performing companies within that sector.
- Mutual funds operate on Net Asset Value (NAV), calculated at the end of the trading day. This means:
- If you buy a mutual fund at 9:00 AM, the purchase will be executed at the NAV determined after the market closes (3:30 PM).
- When you sell, the sale is executed at the NAV of the end of the trading day, and you receive funds after 24 to 48 hours.
- If you buy a mutual fund at 9:00 AM, the purchase will be executed at the NAV determined after the market closes (3:30 PM).
ETFs: Flexible and Cost-Effective
An Exchange-Traded Fund (ETF) functions similarly to mutual funds but trades like stocks on the stock exchange. Key features include:
- ETFs track an index (e.g., Nifty 50, Gold, Pharma) and can be bought or sold at any time during market hours.
- Unlike mutual funds, ETFs do not have active fund management, making them more cost-effective.
- The expense ratio (management fees) of ETFs is usually lower than that of mutual funds.
- ETFs offer real-time trading, meaning you can buy or sell them at the current market price instead of waiting for the NAV calculation.
- Minimum investment in ETFs is usually lower—you can buy just one unit of an ETF, whereas mutual funds may require a minimum investment amount.
Loan Against Mutual Funds (LAMF) – A Unique Advantage
A recent trend in favor of mutual funds is the Loan Against Mutual Funds (LAMF) facility.
- If you have a mutual fund investment of ₹1 lakh, you can get a loan of up to 50% of the investment value.
- Interest rates for LAMF are typically lower than personal loans (e.g., 10.75% per annum).
- There is no impact on your credit score, and documentation is minimal.
- However, not all mutual funds qualify for LAMF, especially tax-saving (ELSS) funds or those outside the demat system.
Top ETFs to Consider in 2025
Here are some ETFs that have shown strong historical performance. Disclaimer : This is not financial advice—always consult a professional before investing.
1. SBI ETF Nifty 50
- Tracks the Nifty 50 index, providing a stable long-term return.
- Average 5-year return: 15.6%.
- Expense ratio: Very low, making it a cost-effective option.
2. Nippon India ETF Junior BeES (Nifty Next 50)
- Invests in companies ranked 51-100 in the Nifty index.
- More volatile but historically strong returns.
- 5-year return: 125% (money more than doubled).
3. Kotak Nifty PSU Bank ETF
- Focuses on public sector banks (PSU banks).
- 3-year return: Over 140%.
4. Motilal Oswal Nasdaq 100 ETF
- Provides exposure to top 100 US companies.
- Average annual return: 23.6% (though this may stabilize over time).
5. Gold ETFs
- Gold has delivered strong returns over 10 years (13% annualized return).
- Ideal for portfolio diversification and stability.
Final Thoughts
Both mutual funds and ETFs have their advantages and limitations. If you prefer active management and LAMF benefits, mutual funds may be ideal. However, if you seek lower costs, flexibility, and real-time trading, ETFs could be a better choice.
As always, conduct thorough research or consult a financial advisor before making investment decisions. Happy investing!
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