Understanding ETFs vs. Mutual Funds and Top ETFs to Consider in 2025

Financial instruments like Exchange-Traded Funds (ETFs) and Mutual Funds can be a great way to grow wealth, but many investors find themselves confused about the differences between the two. Don't worry, we’ll break down the key differences between ETFs and Mutual Funds. We will also share highlights on some ETFs worth considering in 2025 based on their historical performance. Please note that this is not financial advice; always consult a qualified financial advisor before making investment decisions.

ETFs vs. Mutual Funds: The Key Differences

1. Structure and Trading

• Mutual Funds: A Mutual Fund is a portfolio of stocks or other assets managed by a professional fund manager. For example, if you invest in a Nifty 50 Mutual Fund, the manager purchases stocks in the same proportion as the Nifty 50 index, allowing you to benefit from its growth. Sector-specific Mutual Funds (e.g., pharma, logistics, or financial services) involve active decisions by the manager on which stocks to buy or sell within that sector. However, Mutual Funds are traded only at the end of the trading day based on their Net Asset Value (NAV), calculated after the market closes. This means if you place an order at 9:00 AM, the transaction is executed at the NAV determined after the market closes at 3:30 PM, and it may take 1–2 days for the units to reflect in your account or for funds to be credited when selling.
• ETFs: ETFs, or Exchange-Traded Funds, are also portfolios of assets, such as stocks, gold, or indices like the Nifty 50 or Next 50. Unlike Mutual Funds, ETFs are traded on stock exchanges, just like individual stocks. This allows investors to buy or sell ETFs at any time during market hours, providing instant execution and transparency. For instance, if you buy an ETF at 9:15 AM, the transaction is completed immediately, and you know the exact price. This flexibility is a fundamental difference that makes ETFs appealing to many investors.

2. Cost and Management

• Mutual Funds: Mutual Funds often involve active management, requiring research to select and adjust the portfolio. This leads to higher expense ratios, as fund houses employ research teams to make investment decisions. Active Mutual Funds may involve frequent buying and selling, increasing costs.
• ETFs: ETFs are typically passive investments that track an index (e.g., Nifty 50) or a specific asset like gold. Since they don’t require extensive research or active management, ETFs generally have lower expense ratios, making them more cost-effective. Periodic rebalancing (every three to six months) ensures they stay aligned with the tracked index.

3. Minimum Investment

• Mutual Funds: Mutual Funds often require a minimum investment, typically starting at ₹500 or more, depending on the fund’s NAV and rules.
• ETFs: ETFs have a lower entry barrier, as you can purchase even a single unit, similar to buying a single stock. This makes ETFs more accessible for investors with smaller budgets.

4. Loan Against Investment

• Mutual Funds: A significant advantage of Mutual Funds is the ability to take a Loan Against Mutual Funds (LAMF). For example, if you have ₹1 lakh invested in eligible Mutual Funds, you could secure a loan of up to 50% of the investment value (₹50,000) at a fixed interest rate (currently around 10.75% per annum). This loan requires only interest payments, with the option to repay the principal at your convenience. LAMF is advantageous because it doesn’t require a high credit score, has minimal documentation, and allows prepayment without extra charges. However, the Mutual Fund units are locked during the loan period and cannot be sold until the loan is repaid. Not all Mutual Funds are eligible for LAMF (e.g., those in demat form outside certain platforms or ELSS funds with a 3-year lock-in).
• ETFs: Currently, ETFs do not offer a similar loan facility, which is a notable advantage for Mutual Funds in terms of liquidity and financial flexibility.

Top ETFs to Consider in 2025

Here are some ETFs that have historically performed well over three to five years, based on personal research. Please conduct your own due diligence and consult a financial advisor before investing, as past performance is not a guarantee of future results.

1. HDFC Nifty 50
   ETF
   • Focus: Tracks the Nifty 50 index, comprising India’s top 50 companies.
   • Why Consider?: Offers stable returns over the long term due to the resilience of large-cap companies. It has delivered an average 5-year return of 15.6%, with an exceptionally low expense ratio.
   • Suitability: Ideal for investors seeking steady growth over 5 years.
2. Nippon India ETF Junior BeES
   • Focus: Tracks the Nifty Next 50 index, covering companies ranked 51–100 in India.
   • Why Consider?: These mid-cap companies carry slightly higher risk but offer potentially higher returns.
   • Suitability: Suitable for investors comfortable with moderate risk and a long-term horizon.
3. Kotak Nifty PSU Bank ETF
   • Focus: Invests in Public Sector Undertaking (PSU) banks.
   • Why Consider?: Has shown remarkable performance, driven by the strong recovery of PSU banks.
   • Suitability: Best for investors looking for sector-specific exposure and willing to accept higher volatility.
4. Motilal Oswal NASDAQ 100 ETF
   • Focus: Invests in the top 100 companies listed on the NASDAQ, including giants like Google, Apple, and Microsoft.
   • Why Consider?: Provides exposure to the U.S. market, it remains a strong option for international diversification.
   • Suitability: Ideal for investors seeking global exposure with a higher risk-reward profile.
5. ICICI Prudential Gold ETF
   • Focus: Tracks the price of gold in India.
   • Why Consider?: Gold has outperformed many asset classes, delivering over 13% annualized returns over the past 5–10 years, surpassing even the Nifty 50. The ETF has achieved a 19.4% return over five years, nearly doubling investments.
   • Suitability: Perfect for diversification and as a safe asset, especially for younger investors following the “100 minus age” rule (e.g., at age 25, allocate 25% to safe assets like gold and 75% to equities).

Investment Tips

• Long-Term Perspective: When choosing ETFs or Mutual Funds, focus on performance over at least three to five years, not just the last year. Consistent returns over a longer period indicate reliability.
• Diversification: Combine safe assets like gold with equity-based ETFs to balance risk and reward, especially as your financial responsibilities grow with age.
• Research: Explore additional ETFs and Mutual Funds through reliable forums and platforms to identify options that align with your goals.
• Professional Guidance: Always consult a financial advisor to tailor investments to your risk appetite, financial goals, and market conditions.

Disclaimer

Mutual fund investments are subject to market risks, read all scheme related documents carefully. Past performance is not indicative of future results. The information provided in this article is for educational purposes only and does not constitute financial advice. Investors are advised to consult a SEBI-registered investment advisor before making any investment decisions. The ETFs mentioned are based on historical performance and personal research, and no entity has paid for their inclusion. Brokerage and other charges may apply, and investors should carefully review the scheme-related documents, including the risk factors, before investing.