ETF vs Mutual Fund for SIP in India: A clear guide
If you’re torn between ETF vs Mutual Fund for SIP in India, you’re not alone. Many first time investors love the automation and simplicity of mutual fund SIPs, while ETFs attract cost conscious investors who want intraday control and potentially lower expense ratios. In this friendly, practical guide, we’ll compare both on costs, taxation, SIP convenience, liquidity, and tracking error in both mutual funds and ETFs.
What are mutual funds and ETFs?
Mutual Fund
Think of this like a big money basket that copies an index like the Nifty 50. Everyone puts their money in and the fund buys those 50 companies.
- You can set up a SIP (auto-debit every month)
- No Demat account needed
- Super easy – you invest and forget
How Mutual Fund Pricing Works
Mutual funds are priced just once a day, and that price is titled as NAV (Net Asset Value).
NAV is calculated at the end of the trading day, after the stock market closes. You can place your order at any time during the day, but your transaction is carried out at that day’s closing NAV, not instantly.
So even if you place your SIP at 10 AM, the units are assigned based on the NAV declared after market close.
ETF (Exchange-Traded Fund)
An ETF is also a money basket that copies an index (like Nifty 50), but it trades like a stock on the stock market during the day.
- Can buy/sell anytime during market hours
- Lower costs (expense ratio is small)
- Needs a Demat + trading account
The key difference:
Nifty 50 ETF → trades live like a stock
Nifty 50 Index Fund → you invest anytime, but your order is executed only once daily, at the end of day price
SIP in ETFs vs SIP in Mutual Funds
Mutual funds support native SIP: you pick a date, money auto debits, and units allotted at that day’s NAV.
In ETFs, you have to manually invest (no direct SIP setup). But many modern brokers like Groww offer a feature that lets you set up SIPs in ETFs, even though ETFs don’t have a built in SIP option like mutual funds.
So if you’re comfortable using a trading app and have a Demat account, you can still invest in ETFs systematically every month, just like a regular SIP.
Just keep in mind:
- The buy happens during market hours
- The price depends on live market value (not a fixed NAV like mutual funds)
Quick take: If you prefer maximum automation and minimal admin, an index mutual fund SIP is simplest. If you want intraday control and are comfortable with basic order types, ETF + broker automation can work well.
Fast Comparison: ETF vs Index Mutual Fund
| Parameter | ETF | Index Mutual Fund |
| SIP support | No native SIP (broker “SIP‑like” orders) | Yes (auto‑debit) |
| Demat needed | Yes (trades on exchange) | No |
| Pricing | Intraday market price; watch bid-ask spread | End of day NAV |
| Expense ratio | Typically lower | Often higher than equivalent ETF |
| Liquidity | Depends on volume & spreads | Liquidity provided at NAV by the AMC |
| Ease for beginners | Moderate (know basic order types) | High (pure automation) |
Why This Debate Matters Right Now
SIP momentum: India’s mutual fund SIP collections hit ₹27,269 crore in June 2025, reflecting how SIP has become the default investing habit for retail investors. That’s a strong tailwind for any long‑term plan. AMFI India
- Evergreen trend: AMFI’s latest monthly datasets confirm sustained SIP uptake across market cycles evidence that disciplined, periodic investing matters more than timing.
Cost Comparison: Expense Ratio, Brokerage & Spreads
Expense Ratio
ETFs in India usually have very low fees: around 0.05% to 0.30%.
Index mutual funds are a bit more expensive around 0.20% to 1.00%, depending on the AMC and plan.
📌 Even a small fee difference (like 0.20%) can add up a lot over long term compounding. (Always check each scheme’s factsheet.)
Extra Costs with ETFs
While ETFs have lower expense ratios, they come with some extra costs:
- Brokerage fees (charged by your trading platform)
- STT (Securities Transaction Tax)
- Bid-Ask Spread the gap between the buying and selling price. This is usually small for popular ETFs, but can be bigger for less-traded ones.
Pro Tip:
Try to use limit orders while buying ETFs to control the price you pay.
Try to avoid trading right at market open or close, as spreads can widen during those times..
Returns and Tracking Error
Both vehicles aim to match (not beat) their benchmarks. Returns diverge because of:
- Fees, cash drag, and replication method (full vs sampling), and
- Execution for ETFs (intraday price and spread).
Liquid ETFs typically keep tracking error tight. Thinly traded ETFs can deviate more.
For index funds, tracking error comes from expense ratio, sampling and cash flows. Check the fund’s tracking difference and 3‑year tracking error before you buy. NSE India
Liquidity & Ease of Investment (ETF Liquidity vs Mutual Fund in India)
- ETFs: Liquidity lives on the exchange. Prefer ETFs with higher average traded value and tight bid–ask spreads; use limit orders. If you plan monthly buys, consider placing orders near the iNAV during normal liquidity windows (avoid opening/closing minutes).
- Index Funds: The AMC handles your buy/sell at NAV, regardless of market microstructure. For most beginners, this simplicity + automation is a feature, not a bug.
What Is iNAV in ETFs?
When you invest in mutual funds, you buy at the end-of-day NAV: the price is fixed once daily.
But ETFs trade like stocks: prices change all day long. So how do you know what the ETF is really worth right now? That’s where iNAV (Indicative NAV) comes in.
In Simple Words:
iNAV is the real time estimate of what the ETF’s value should be, based on the value of its underlying assets. It updates throughout the day, like a live price tag on the ETF.
Why It Matters for Investors:
If you buy or sell an ETF way above or below the iNAV, you could:
❌ Overpay (if the market price is higher than iNAV)
✅ Buy it at a discount (if it’s trading below its iNAV)
Always check the iNAV before trading, especially for less liquid ETFs, to avoid surprises. On the NSE website and some brokers show iNAVs live, it’s a helpful tool for smarter ETF investing.
Taxation in India (Updated: Equity & Non‑Equity)
Equity (Equity oriented mutual funds & equity ETFs)
Sold within 1 year? Pay 20% tax
Held for over 1 year? Pay 12.5% tax
→ First ₹1.25 lakh profit each year is tax-free
Non Equity (many Debt or Gold funds/ETFs)
Held long term? Pay 12.5% tax
Which Is Better for SIP Investors in India?
Pick an Index Mutual Fund SIP if you want…
- Pure automation (auto debit) with no Demat.
- A low friction, behavior friendly path ideal for beginners or anyone who doesn’t want to time orders.
Pick an ETF if you want…
- Lower ongoing costs and intraday control.
- You already use a Demat and understand limit orders, liquidity, and spreads.
- You plan to buy liquid ETFs (e.g., Nifty 50 ETF) and are okay using a broker’s SIP‑like automation.
Summary
- SIP convenience: both mutual funds & ETFs win.
- Costs & control: ETFs can win (lower expense ratio, intraday control) if you pick liquid funds and use limit orders.
- Taxes: Equity ETFs and equity index funds follow the same updated regime: STCG 20%, LTCG 12.5% with ₹1.25 lakh annual exemption on equity LTCG. Non‑equity categories differ check classification.
Next steps:
- Decide if you value automation (index fund SIP) or intraday control (ETF).
- Shortlist 2–3 low cost, broad market options with strong liquidity and low tracking error.
- Start small this month; review in 6–12 months and scale.
FAQs
For pure SIP convenience, index mutual funds are better (auto debit, no Demat). If you’re comfortable with Demat, order types, and want lower ongoing costs, ETFs can work very well especially the highly liquid ones.
Broadly, ETFs often have lower expense, but add brokerage, STT, and bid–ask spread. Index funds have higher expense ratio but no trading frictions. Compare total cost for your style and frequency.
No. Dividends are added to your income and taxed as per your income slab.
Yes certain ETFs do pay dividends if the companies they hold give dividends. But most ETFs follow the growth option, where dividends are reinvested instead of pay out. Always verify the ETFs factsheet to see which type you are investing in.
No, regular ETFs in India don’t have any lock-in. You can buy or sell them freely during market hours.
Other recommended reads:
Rise & fall of sovereign gold bonds
Sukanya samriddhi yojana 2025: returns, rules & benefits explained
Provident funds in India: A simple guide for long term savings
