ETFs vs. Mutual Funds: Owning Many Companies at Once

1.1 — "Who has time to research thirty companies?"

Raj had let that sit for two weeks before coming back to it, which Riya suspected was deliberate.

"Your objection was fair," he said. "You don't have time to research thirty companies. Neither do I. Almost nobody does — which is why almost nobody does it that way."

"Then how do people own thirty companies?"

"They buy one thing that already contains thirty. Or a hundred. There are two common versions and the difference between them is smaller than people pretend, but it's worth getting right."

1.2 — The mutual fund

A **mutual fund** pools money from thousands of investors into a single fund, which a professional manager invests across many companies according to the fund's stated mandate. Buying into it buys a proportional slice of that entire basket — every company in it, in the proportions the fund holds them.

Its price is calculated once a day, after the market closes, and is called the **NAV** (Net Asset Value). Orders placed during the day execute at that day's NAV rather than at a live, moving price.

"So I can't pick my entry price," Riya said, thinking about limit orders.

"You can't. For most people buying monthly over twenty years, that turns out not to matter very much. For you, right now, having just discovered you enjoy picking entry prices — you'll find it irritating."

1.3 — The SIP, and why it suits people who are bad at deciding

The common way to buy one in India is a **SIP** — a Systematic Investment Plan — a fixed amount invested automatically every month, on a set date, regardless of what the market is doing that week.

"The mechanical part is the point," Raj said. "No decision. No waiting for a good moment. You buy a bit at high prices and a bit at low prices and over enough years the timing question mostly dissolves. It is the least exciting thing in investing and it's how a very large number of people actually build wealth."

1.4 — The ETF

An **ETF** — Exchange Traded Fund — holds a basket in exactly the same way, but trades on the exchange like an ordinary share. Its price moves continuously through the session and you buy it through a broking account, with market or limit orders, exactly as you'd buy a stock.

Most ETFs are **passive**: rather than a manager selecting companies, the fund simply tracks a published index, holding the same companies in the same weights. Many mutual funds are **active** — a manager is choosing, and is paid for choosing.

1.5 — The number Raj made her look at

"An actively managed fund might charge 1.5% a year," Raj said. "A passive index ETF might charge 0.2%. That difference sounds like nothing."

"It is nothing. It's one point three per cent."

"It's one point three per cent *every year*, charged on the whole balance, including on the growth from previous years." He wrote two numbers down and slid them over. Over a twenty-five-year horizon, on the same underlying returns, the gap between them was not a rounding error. It was a meaningful fraction of the final amount, handed over for a service that may or may not have beaten the index it was competing with.

This is the **expense ratio**, and it is the most reliably underestimated number in personal finance. A fee is deducted every year, which means it compounds against you in exactly the way returns compound for you.

1.6 — What Riya did

She thought about it properly, and she acted. She set up a SIP into a broad, low-cost fund holding a hundred-odd companies across a dozen industries — ₹5,000 a month, automatic, out of her salary on the third of every month.

She was pleased with the decision and told Raj so. It was, genuinely, the right instrument, chosen for the right reasons, at a sensible cost.

She funded it out of what she was saving each month from her salary. She did not sell a single share of Aman's bakery to seed it. The idea did not seriously occur to her — the bakery was the part of her portfolio that had *worked*, and the new fund was for new money, and both of those sentences felt obviously true at the time.

So on the third of the following month, ₹5,000 went into a hundred companies. And roughly four-fifths of everything she owned in the world stayed exactly where it had been for five years.

She had added a second thing. She had not reduced the first. It would take about eleven months for the difference between those two sentences to become the most expensive distinction of her life.

1.7 — The call

It came on a Thursday afternoon, at work, from Aman, and he did not start with hello.

"Have you seen the news?"

1.8 — The real world translation