This Article was fact checked and last updated for accuracy on November 3, 2025 by Mani Karthik
My first investment mistake in India cost me ₹73,000.
Not because I picked the wrong fund. I picked regular plans instead of direct plans.
The commission? Hidden. The impact? Massive over time.
This was 2018. I had just moved back from the US a year earlier.
Used to Vanguard index funds. Low cost. Simple. Transparent.
Indian mutual funds felt different. Too many options. Too many fund houses. Too much noise.
Then someone mentioned ETFs. Exchange Traded Funds.
Sounded familiar. Like what I used in the US.
I bought my first Indian ETF in 2019. Nifty 50 ETF through Zerodha.
Five years later, I own both ETFs and mutual funds.
Different purposes. Different strategies.
Let me show you what I learned spending real money.
What Actually Are ETFs and Mutual Funds
Think of mutual funds as a taxi service.
You tell them where you want to go. They pick you up. Drop you off. Charge a fee.
ETFs are more like rental cars.
You drive yourself. More control. Usually cheaper. But you need to know how to drive.
| Aspect | Mutual Funds | ETFs |
|---|---|---|
| What They Are | Pooled investments managed actively or passively | Traded on stock exchange like shares |
| How You Buy | Directly from AMC or platforms | Through broker on exchange |
| Trading | Once daily at NAV | Real time during market hours |
| Management | Active or passive | Mostly passive (index tracking) |
My wife understood this analogy immediately.
She prefers mutual funds. Set and forget.
I like ETFs for certain parts of my portfolio. Lower costs. More flexibility.
When you’re deciding between mutual funds or stocks as a returning NRI, ETFs sit somewhere in between.
The Cost Difference Nobody Explains Properly
Here’s where ETFs win dramatically.
Expense ratios.
| Fund Type | Average Expense Ratio | Example on ₹10L Investment |
|---|---|---|
| Active Mutual Funds | 1.5% to 2.5% | ₹15,000 to ₹25,000 annually |
| Index Mutual Funds | 0.1% to 0.5% | ₹1,000 to ₹5,000 annually |
| ETFs | 0.05% to 0.2% | ₹500 to ₹2,000 annually |
Numbers from SEBI filings, November 2025.
That difference compounds brutally over time.
I ran the numbers once. Made my head hurt.
₹10 lakhs invested over 20 years at 12% returns:
With 2% expense ratio: Final corpus ₹79.4 lakhs With 0.2% expense ratio: Final corpus ₹92.5 lakhs
Difference? ₹13.1 lakhs. Just from fees.
Here’s the catch: Lower fees don’t always mean better returns. But they do mean you keep more of what you earn.
When I worked at Druva, our CFO showed me this calculation.
Changed how I think about investing forever.
Similar to how choosing the right trading platform matters. Small differences compound.
My First ETF Purchase Story
Opened Zerodha in 2019. Searched for Nifty 50 ETF.
Found three options. Nippon India ETF. ICICI Pru ETF. SBI ETF.
Which one to buy? They all tracked the same index.
Called my friend who works at Goldman Sachs. He laughed.
“Pick the one with highest trading volume. Liquidity matters.”
Bought Nippon India Nifty 50 ETF. 100 units at ₹156 each.
Total investment ₹15,600.
Today those units are worth approximately ₹23,800.
Not because I’m smart. Because Indian markets went up.
The expense ratio? 0.05%. On ₹15,600, that’s ₹7.80 annually.
A comparable active large cap mutual fund would charge ₹234 annually.
Saved ₹226 per year. Small amount. But I sleep better knowing I’m not overpaying.
My US born son asked why this matters.
Showed him the 20 year calculation. He got it immediately.
💡Tip: If you’re investing after returning to India, start with low cost index ETFs. Learn the market. Add active funds later if needed.
The Convenience Factor
Mutual funds win here. Hands down.
Set up a SIP. Money goes automatically. Units get bought. Portfolio grows.
Zero effort after initial setup.
ETFs? You need to buy manually. Log into broker. Place order. Execute trade.
My SIP investments run on autopilot.
My ETF purchases? I do them quarterly. Manually. When I remember.
| Feature | Mutual Funds | ETFs |
|---|---|---|
| SIP Available | Yes, automated | No (manual buying only) |
| Auto Debit | Yes | No |
| Fractional Units | Yes | No (whole units only) |
| Investment Amount | Any amount (₹500+) | Depends on unit price |
| Effort Required | Once (setup SIP) | Every time (manual trade) |
This matters more than people realize.
My mom invests in mutual funds. She’s 70. SIP works perfectly for her.
Imagine asking her to log into Zerodha every month. Place buy orders. Check prices.
Never happening.
I manage her portfolio through Kuvera. Set and forget.
ETFs would add unnecessary complexity to her life.
“I don’t want to think about buying every month. Just take the money and invest it.” – My mom’s investment philosophy
Simple. Effective. Works.
The Tax Treatment Maze
This is where things get messy.
Both ETFs and mutual funds follow the same tax rules now.
After Budget 2024 changes:
| Tax Type | Rate | Exemption Limit |
|---|---|---|
| Short Term Capital Gains (under 12 months) | 20% | None |
| Long Term Capital Gains (over 12 months) | 12.5% | ₹1.25 lakhs per year |
| Dividend | Added to income, taxed at slab | None |
Same for both. No advantage either way.
But here’s something interesting.
When I lived in the US, I paid taxes on mutual fund distributions even without selling.
In India? You only pay tax when you sell.
Much better system.
When filing ITR after moving back, both ETFs and mutual funds are equally simple to report.
Capital gains statement from your broker or AMC. Enter numbers. Done.
My CA charges the same whether I have ETFs or mutual funds. No difference.
Active vs Passive Debate
Most ETFs are passive. They track an index.
Mutual funds can be active or passive.
Active means a fund manager picks stocks. Tries to beat the market.
Passive means following an index. No human stock picking.
Here’s the data that changed my mind.
Over 10 years, approximately 80% of active large cap funds fail to beat Nifty 50.
Source: SPIVA India Scorecard, S&P Dow Jones Indices.
That’s 8 out of 10 funds. Charging you high fees. Underperforming a simple index.
The remaining 20%? Some genuinely good. Some just lucky.
How do you pick the winners beforehand? Nobody knows.
What this really means is: Most active management is expensive noise. Index investing works for most people.
I worked at SuperMoney before moving back. We analyzed thousands of financial products.
The simplest solutions usually win long term.
That said, I still own some active mutual funds.
Small cap funds. International funds. Thematic plays.
Areas where active management might add value.
My core portfolio? 60% in index ETFs and index mutual funds. Low cost. Boring. Effective.
Similar to how investment options for NRIs should balance simplicity with returns.
Liquidity and Trading
ETFs trade like stocks. Buy and sell anytime during market hours.
Saw markets crashing? Sell your ETF immediately.
Want to buy the dip? Execute instantly.
Mutual funds? One NAV per day. Whatever the closing price is.
| Factor | Mutual Funds | ETFs |
|---|---|---|
| Trading Window | Once daily (NAV based) | Market hours (9:15am to 3:30pm) |
| Price Certainty | Unknown until end of day | Known immediately |
| Exit Load | Usually 1% if sold before 1 year | None (pay brokerage only) |
| Liquidity | High (AMC must redeem) | Depends on trading volume |
The liquidity advantage sounds great.
Reality? I never use it.
Know why? Because trying to time markets is how people lose money.
My ETF holdings sit untouched. Same as my mutual funds.
The flexibility exists. I don’t use it.
That’s probably why it works.
When markets crashed in March 2020, I didn’t sell anything.
When they rallied in 2021, I didn’t try to time the peak.
Stayed invested. Let compounding work.
The ability to trade ETFs anytime can be a curse. Makes you think you should trade.
You shouldn’t.
Quick Recap:
✅ ETFs give trading flexibility you probably shouldn’t use
✅ Mutual funds force patience through daily NAV system
✅ For long term investors, this difference barely matters
✅ For nervous traders, ETFs enable bad behavior
The Tracking Error Problem
ETFs are supposed to match their index exactly.
Reality? They don’t.
There’s always a tracking error.
Nifty 50 goes up 15%? Your Nifty ETF might go up 14.8%.
That 0.2% difference is tracking error.
Happens because of:
- Expense ratio eating returns
- Cash drag from dividends
- Transaction costs from rebalancing
Index mutual funds have the same issue. Sometimes worse.
But here’s the thing.
Good ETFs keep tracking error under 0.2%.
Bad ETFs? Can go up to 1% or more.
I compare tracking errors before buying any ETF now.
Data available on Value Research Online and Morningstar India.
Picked an ETF with 0.8% tracking error once. Thought I was saving on expense ratio.
Lost more to tracking error than I saved on fees.
Learned that lesson.
When evaluating best investment options in India, total cost matters. Not just headline expense ratio.
What Works for Different Goals
Here’s how I actually use both.
Core portfolio for retirement? Index ETFs and mutual funds.
Nifty 50. Nifty Next 50. Nifty 500. Low cost. Passive. Boring.
Kids’ education fund? Equity mutual funds through SIP.
Automated. Disciplined. No thinking required.
Emergency fund? Liquid mutual funds.
Better returns than savings account. Easy redemption.
Opportunistic plays? ETFs for quick exposure.
Want to bet on banking sector? Buy a banking ETF. Want to exit? Sell it immediately.
| Goal | My Choice | Why |
|---|---|---|
| Retirement (25+ years) | Index ETFs + Index Funds | Lowest cost, long horizon |
| Education (10-15 years) | Active Equity Funds via SIP | Automation matters here |
| Emergency Fund | Liquid Funds | Not ETFs, need stability |
| Short Term Exposure | Sector ETFs | Easy entry and exit |
| Gold Investment | Gold ETF | Better than physical, lower cost than Gold MF |
This setup works for me.
Your situation might need different allocation.
When I help people in the BackToIndia community, I ask about their goals first.
No one size fits all answer exists.
My wife handles her portfolio differently. More mutual funds. Fewer ETFs.
Her returns are similar to mine. Different path. Same destination.
The International Investing Angle
Want to invest in US stocks from India?
Two options. ETFs or international mutual funds.
I tried both.
Bought Nasdaq 100 ETF through Zerodha in 2020. Process was smooth.
Also invested in international mutual funds through Groww.
The returns? Similar. The experience? Different.
International ETFs need a broker that offers them. Not all do.
International mutual funds available everywhere.
The tax treatment? Complicated for both.
Taxed as debt funds. Short term at slab rate. Long term at 20% with indexation.
Different from domestic equity. Messy for tax filing.
My advice? If you’re investing internationally, focus on mutual funds first.
Unless you’re using specific apps for US stocks, stick with funds.
Simpler paperwork. Easier management.
Common Mistakes I See Millennials Make
Mistake one: Chasing high returns.
Saw a sectoral ETF go up 40% last year. Bought it. Down 15% this year.
Lesson learned.
Mistake two: Ignoring costs completely.
Bought a fund with 2.3% expense ratio. “Returns are good,” I thought.
Returns were 13%. After fees, I got 10.7%.
Index fund gave 12%. After 0.1% fees, I kept 11.9%.
Math hurts sometimes.
Mistake three: Over diversification.
Had 23 mutual funds at one point. Thought I was smart.
Actually held the same stocks across funds. Just paying multiple expense ratios.
Consolidated to 8 funds. Portfolio performs better. Life is simpler.
Mistake four: Panic selling.
March 2020. Markets crashed. Friend sold everything. “I’ll buy when it recovers.”
Markets recovered faster than he expected. Bought back higher.
Lost 18% trying to time the market.
I stayed invested. Down 30% on paper for two months. Portfolio recovered fully by October 2020.
My take: Most millennials, including past me, overcomplicate investing. Simple beats complex almost always.
When I worked at HappyFox, our founder kept his investments dead simple.
Three index funds. Monthly SIP. Nothing else.
He’s doing fine.
The Minimum Investment Reality
ETFs need you to buy whole units.
If a unit costs ₹500, minimum investment is ₹500.
If it costs ₹2,000, you need ₹2,000.
Can’t buy 0.3 units. Unlike mutual funds.
Mutual funds let you invest any amount. ₹500. ₹1,000. ₹7,347. Whatever.
Fractional units are allowed.
This matters when you’re starting out.
My nephew wanted to start investing. Had ₹2,000 per month.
With ETFs? He could buy maybe 3-4 units of something.
With mutual funds? He invested exact ₹2,000 across three funds.
Better utilization of capital.
Once you have larger amounts, this difference disappears.
But for beginners, mutual funds win on accessibility.
Similar to how starting with the right platform matters when you’re learning.
What I’d Tell My Younger Self
If I could go back to 2018 when I first started investing in India:
Start with index mutual funds. Not active funds.
Set up SIPs. Forget about them.
Once comfortable, add Nifty 50 ETF through Zerodha.
Keep it simple. Ignore the noise.
Don’t try to pick the next multibagger.
Don’t chase last year’s best performer.
Don’t panic when markets fall.
Boring works. Exciting loses money.
I’d tell myself to save the ₹73,000 I wasted on regular plans.
Direct plans exist for a reason. Use them.
Platforms like Groww and Kuvera didn’t exist in 2018. Now they do.
Use them. They’re free. They save you money.
When you’re setting up SIPs and mutual funds, direct plans are non negotiable.
Commission free. Better returns. No brainer.
My Current Allocation
Here’s my actual portfolio today.
₹12 lakhs in Nifty 50 and Nifty Next 50 ETFs.
₹8 lakhs in large cap index mutual funds.
₹5 lakhs in active mid cap mutual funds via SIP.
₹3 lakhs in international mutual funds.
₹2 lakhs in gold ETF.
Total: ₹30 lakhs in mutual funds and ETFs combined.
67% passive. 33% active.
60% domestic equity. 10% international. 7% gold. 23% in FDs and other instruments.
Returns over last 3 years: 14.7% CAGR.
Nothing spectacular. Beating inflation. Compounding steadily.
That’s all I need.
My wife has her own portfolio. Different allocation. Similar returns.
My mom’s portfolio is 100% mutual funds. No ETFs. Doing great.
There’s no perfect answer. Just what works for your situation.
For NRIs and Returning Indians
If you’re still an NRI, mutual funds are easier.
ETFs need a trading account. More paperwork for NRIs.
Mutual funds? Available through NRE/NRO accounts. Simpler process.
If you’re returning to India like I did, you’ll get access to both.
Take time to learn. Don’t rush.
I made the mistake of rushing in 2018. Cost me money.
Start with mutual funds. Add ETFs when you’re comfortable with brokers and trading.
The goal isn’t to use every product. The goal is to build wealth steadily.
When planning finances after moving back, prioritize simplicity over sophistication.
Which One Should You Choose
Choose Mutual Funds if:
- You want automated SIP investing
- You prefer set and forget approach
- You’re starting with small amounts
- You want active fund management option
- You’re risk averse about market timing
Choose ETFs if:
- You want lowest possible costs
- You’re comfortable with broker platforms
- You invest lump sum amounts
- You understand index investing
- You can resist the urge to trade
Choose both if:
- You want to optimize everything (guilty)
- You have large enough portfolio for both
- You understand the differences
- You want passive core with active satellites
Most millennials should start with mutual funds.
Add ETFs after you understand markets better.
That’s the path I took. Worked well.
Your path might differ. That’s fine.
Sources and References
All data verified as of November 2025 from:
- SEBI mutual fund regulations: www.sebi.gov.in
- AMFI industry data: www.amfiindia.com
- SPIVA India Scorecard: www.spglobal.com/spdji/en/spiva/
- NSE ETF data: www.nseindia.com
- Value Research Online: www.valueresearchonline.com
- Income tax regulations: www.incometaxindia.gov.in
Expense ratios and fund performance subject to change. Verify current details before investing.
For more on mutual fund platforms, read my comparison of Groww vs Kuvera.
TLDR Version
ETFs:
- Pros: Lower costs (0.05% to 0.2%), trade like stocks, tax efficient, flexible
- Cons: No SIP automation, need trading account, whole units only, requires more knowledge
- Best for: Cost conscious investors, lump sum investing, experienced investors
- Tax: 12.5% LTCG above ₹1.25L, 20% STCG
Mutual Funds:
- Pros: SIP automation, fractional units, easier for beginners, active management option
- Cons: Higher costs (0.5% to 2.5%), one NAV per day, exit loads possible
- Best for: Automated investing, small amounts, hands off approach, beginners
- Tax: Same as ETFs now (12.5% LTCG, 20% STCG)
My actual strategy:
- Core portfolio: Index ETFs and index mutual funds (60% of equity)
- SIP investments: Active mutual funds (40% of equity)
- Why both? ETFs for cost. Mutual funds for convenience.
- Total saved vs active funds: Approximately ₹45,000 annually on ₹30L portfolio
For millennials specifically:
- Starting out? Mutual funds via SIP
- Have lump sum? Mix of both
- Want lowest cost? ETFs
- Want simplicity? Mutual funds
- Don’t overthink it. Start investing. Both work.
Reality check: The mutual fund vs ETF debate matters less than actually investing consistently. I know people crushing it with only mutual funds. I know people doing great with only ETFs. Pick one. Start. Adjust later.
Questions? Ask in BackToIndia Groups. Someone there has tried everything and will tell you what actually works.