ETF vs mutual fund in India explained
Quick Answer: An ETF is a mutual fund scheme whose units must be listed and traded on a stock exchange, so its price moves through the day. Other mutual fund schemes deal with the fund house at the day's closing NAV. In India both follow the SEBI (Mutual Funds) Regulations, 2026, and tax depends on portfolio mix.
India's market regulator treats an exchange traded fund as one type of mutual fund scheme. It is not a separate product. The SEBI (Mutual Funds) Regulations, 2026, in force from 1 April 2026, define an ETF as a scheme that tracks an index and whose units are mandatorily listed and traded on a stock exchange.
Most of the practical gaps flow from that single listing rule: where units change hands, which price applies, which account is needed and what the fund may charge. Tax is another matter, governed by the Income-tax Act, 2025.
What is the difference between an ETF and a mutual fund?
The main difference is the trading route: ETF units trade on an exchange at market prices, while other open-ended schemes deal with the fund house at NAV. Regulation 29(3) of the 2026 regulations says every ETF shall be listed on a recognised stock exchange.
ETF vs other open-ended mutual fund schemes in India (SEBI (Mutual Funds) Regulations, 2026 and SEBI Master Circular for Mutual Funds; as of 22 September 2026)
| Feature | ETF | Other open-ended scheme |
|---|---|---|
| Where units trade | Stock exchange, listing mandatory | With the fund house |
| Price paid | Market price in trading hours | Closing NAV under the 3:00 pm cut-off |
| Intraday value | iNAV on the exchange | None; NAV once a day |
| Account | Demat account through a broker | Statement of account, or demat by choice |
| Dealing with the AMC | Only above ₹25 crore | Always |
| Base expense ratio cap | 0.90% of daily net assets | Up to 2.10% for equity schemes |
For a regular scheme, SEBI's master circular for mutual funds, dated 20 March 2026, ties the price to a cut-off. Purchase money credited to the scheme's bank account by 3:00 pm earns that day's closing NAV, and redemption requests received by 3:00 pm on a business day get the same day's NAV, outside liquid and overnight funds.
An ETF works differently. Each fund house must appoint at least two market makers, who are exchange members, to keep quotes flowing. Investors can transact with the AMC directly only above ₹25 crore, a threshold that does not apply to market makers. Multibagg's ETF section lists the ETFs traded in India with their expense ratios and holdings.
ETF vs mutual fund in India in 2026: costs and taxation
From 1 April 2026, regulation 66(7) caps the base expense ratio of an open-ended index fund or ETF at 0.90% of daily net assets. An open-ended equity-oriented scheme may charge up to 2.10% on its first ₹500 crore, with the ceiling stepping down in slabs to 0.95% on the largest assets.
That base figure is not the whole bill. Brokerage can sit on top of it, up to 0.06% of trade value for cash market trades, along with exchange transaction costs and statutory levies. Regulation 67 adds these together as the total expense ratio.
Some costs sit outside the scheme. An ETF holder pays broker charges on each exchange trade, plus the spread between the bid and offer price. A regular scheme avoids those, although it may levy a load on redemption, which the regulations permit if disclosed.
Taxation moved to a new statute in 2026. Transfers from 1 April 2026 fall under the Income-tax Act, 2025, which replaced the 1961 Act and kept the capital gains rates set by the Finance (No. 2) Act, 2024. The old sections 111A, 112 and 112A now sit at sections 196, 197 and 198, and section 50AA sits at section 76.
How do ETF and mutual fund taxes differ in India?
Mostly they do not: the Income-tax Act, 2025 taxes a fund unit by what the portfolio holds, not by whether it trades on an exchange.
Capital gains on ETF and mutual fund units, tax year 2026-27 (Income-tax Act, 2025, sections 2(101), 76, 196, 197 and 198; as of 22 September 2026)
| Portfolio type | Long-term after | Short-term gains | Long-term gains |
|---|---|---|---|
| Equity-oriented (65% or more in listed domestic equity) | 12 months | 20% (s.196) | 12.5% above ₹1.25 lakh (s.198) |
| Specified mutual fund (over 65% debt and money market), units acquired from 1 April 2023 | Never | Normal slab rates (s.76) | Not applicable |
| Other listed units, such as gold ETFs | 12 months | Normal slab rates | 12.5% (s.197) |
| Other unlisted units, such as gold fund of funds | 24 months | Normal slab rates | 12.5% (s.197) |
Sections 196 and 198 set the equity rates, and they apply only where securities transaction tax is paid on the transfer. An ETF sale on the exchange qualifies. So does a redemption with the fund house, since mutual funds collect the tax on equity-oriented schemes.
The one gap the wrapper itself creates sits in non-equity funds. On the statute's own wording, section 2(101) gives a 12-month test to any security listed on a recognised stock exchange, and mutual fund units count as securities under the Securities Contracts (Regulation) Act, 1956. Read that way, a listed ETF meets the shorter test, while an unlisted scheme holding similar assets waits 24 months.
How do the three compare: ETF, mutual fund and index fund?
An index fund is an open-ended mutual fund scheme that tracks an index like an ETF but deals with the fund house at NAV. The 2026 regulations define both by the same test: holding securities in the same proportion as an index.
Both passive formats share the 0.90% base expense cap. Both must keep the portfolio replicating the index after any trade made to meet subscriptions or redemptions. SEBI's master circular also makes every ETF and index fund publish tracking error daily and tracking difference monthly on the fund house and AMFI websites.
Actively managed schemes pick securities instead, so their expense ceiling follows the higher equity-oriented slabs rather than the passive cap. For the ETF route on the Nifty 50, see our explainer on what Nifty BeES tracks and why its price drifts from NAV. Which category an active scheme sits in is not fixed either, as our note on how AMFI's 2026 market-cap review may reshuffle large-cap fund portfolios describes.
Gold is the one asset where the ETF-or-fund choice also changes the tax clock: a gold fund of funds' unlisted units turn long-term after 24 months, against 12 for a gold ETF, as our gold ETF explainer sets out.
Comparing an ETF and a mutual fund with an example
Take two routes to the same Nifty 50 exposure worth ₹50,000. On the ETF route, the investor places an order through a broker during market hours, pays the prevailing market price plus brokerage, and receives units in a demat account.
On the index fund route, the application goes to the fund house. If the money reaches the scheme's account by 3:00 pm on a business day, the units carry that day's closing NAV and appear in a statement of account, with no demat account required.
Both qualify as equity-oriented funds for tax. A sale or redemption within 12 months attracts 20% under section 196. After 12 months, gains above ₹1.25 lakh in the year attract 12.5% under section 198.
When liquidity dries up, the routes differ again. SEBI's rules let ETF investors redeem with the fund house, up to ₹25 crore, in defined stress cases. For a recent case where exchange prices and unit creation diverged, see our note on why international ETFs traded at steep premiums while fund SIPs were shut.
See ETF and fund holdings side by side
ETFs and regular schemes can sit in the same account, which makes allocation easier to read in one view. Multibagg's portfolio dashboard shows sector allocation and risk across connected broker holdings.
Disclaimer: This article is for educational and informational purposes only. Multibagg AI is not a SEBI-registered investment adviser or research analyst, and it does not provide investment, financial, legal or tax advice. Nothing here is a recommendation to buy, sell, hold or invest in any security. Market data is shown as of the dates stated and may have changed since. Please consult a SEBI-registered adviser before making any investment decision.
Aaditya Aanand is the founder and CEO of Multibagg AI. An IIT Kanpur alumnus, he has worked across technology and financial markets at Goldman Sachs and American Express. His writing explores investing, markets and AI.