UCITS Mutual Funds or UCITS ETFs: Which are best for you?

You will often see the terms "UCITS Funds" (which usually refers to UCITS mutual funds) and "UCITS ETFs" used interchangeably without clear definitions.

However, it is critical for investors to understand the distinction. While they sound similar, they are significantly different instruments with distinct cost structures, liquidity rules, and trading mechanisms.

This blog clears up the confusion, explains the structural differences, and helps you decide which vehicle is right for your portfolio.

Table of contents

• What are "UCITS"?
• UCITS Funds vs. UCITS ETFs
• Key differences for investors
• Which one is right for you?
• Where can you buy UCITS funds?
• FAQs

What are "UCITS"?

UCITS (Undertakings for Collective Investment in Transferable Securities) are investment funds that comply with EU (European Union) regulations. Both Mutual Funds and ETFs can carry this stamp.

These funds are legally domiciled in Europe (typically Ireland or Luxembourg), but they can invest in global assets. This means a UCITS fund can hold US stocks like the S&P 500, Nasdaq 100, or global bonds, while benefiting from the European regulatory structure and tax advantages.

To learn more about UCITS and how they protect Indian investors from the up to 40% US Estate Tax, read our guide on the tax advantages of UCITS ETFs over US ETFs.

Difference between UCITS Mutual Funds and UCITS ETFs

The core difference lies in how you buy and sell them, minimum investments, and fees; not necessarily what they hold.

UCITS Funds

The term UCITS Funds generally refers to mutual funds that are not traded on a stock exchange. To invest, you must subscribe (buy) or redeem (sell) units directly with the fund manager, or through a distributor like a bank.

UCITS ETFs

A UCITS ETF is simply a fund that is listed on a stock exchange (like the London Stock Exchange). It trades exactly like a stock (e.g., Apple or Unilever). You buy and sell shares from other investors in the secondary market.

Note: UCITS mutual funds and UCITS ETFs are just like any other mutual fund or ETF. They are called UCITS funds as they comply with the UCITS framework created by the EU.

Key differences for investors

Here is how the structural difference affects investors:

Which one is right for you?

Short Answer: If you want to build a low-cost, tax-efficient portfolio that tracks the market (e.g., S&P 500, Nasdaq, World Index) while avoiding the US Estate Tax risk, UCITS ETFs are almost always the superior choice. Choose UCITS Mutual Funds only if you are specifically seeking a high-conviction active manager to beat the market or need access to illiquid assets.

1. UCITS ETFs: Best for Structural Efficiency

For most "Core" portfolio allocations, ETFs provide structural advantages that mutual funds cannot match.

• Access to Institutional Pricing: This is the biggest financial benefit. An ETF democratizes pricing. You effectively get the low "Institutional" expense ratio (typically 0.07% – 0.25%) without needing to meet the $100,000+ minimum investment thresholds often required to get the same rate in a Mutual Fund.
• Tax Deferral (Accumulating Funds): For Indian investors, avoiding dividends is crucial to defer taxes. It is structurally easier to find "Accumulating" (Acc) variants in the UCITS ETF universe. These automatically reinvest dividends, shielding you from immediate tax events.
• Better Collateral for Margin: If you use margin, UCITS ETFs are generally treated as high-quality collateral with favorable loan-to-value (LTV) ratios on global platforms. They are marginable immediately, whereas mutual funds often have a 30-day waiting period.

Limitation: You are largely restricted to Passive strategies. You cannot easily access concentrated active managers (who might hold only 20 stocks) because the transparency of ETFs would reveal their proprietary research to the market too quickly.

2. UCITS Mutual Funds: Best for Strategic Access

Mutual funds remain relevant for one specific purpose: Unconstrained Alpha.

• Access to High-Conviction Managers: If you seek a specific manager’s ability to beat the market (e.g., a specific Stock Picker), the mutual fund is often the only vehicle available. Managers use this structure to protect their intellectual property (their trades) from being copied by the market.
• Better for Illiquid Assets: In illiquid asset classes (like High Yield Bonds or Small Caps), a Mutual Fund manager can stop accepting new money to protect performance. An ETF generally must keep accepting capital, which can force the manager to buy sub-optimal assets, diluting your returns.

Risk: Higher Retail Fees

The biggest downside with mutual funds is the tiered fee structure. Unless you meet high "Institutional" investment thresholds, you are often relegated to the "Retail" share class. You might pay a 1.50% fee for the Retail class, whereas the Institutional class (holding the exact same assets) charges 0.50%.

Recommended Strategy

We recommend the following approach for investors looking to allocate capital between UCITS funds and ETFs:

1. For "Core" Exposure (US Tech, Global Equity): Use ETFs. There is no structural benefit to paying a Mutual Fund manager higher fees just to track an index. The ETF gives you the institutional-grade cost structure (0.10% - 0.20%) automatically.
2. For "Niche" Exposure (Active/Specific): Use Mutual Funds. If you want specific active exposure, verify the Share Class first. Check if your capital allows you to buy the "Class I" (Institutional) version. If you are forced into the Retail Class (1.5% fee), reconsider if the manager's performance is truly high enough to overcome that 1%+ extra cost.

Where can you buy UCITS funds?

To buy UCITS Funds and ETFs, you need a broker that provides direct access to European exchanges, like the London Stock Exchange (LSE).

Most standard international trading platforms in India default to the US markets (NYSE/NASDAQ), limiting you to US-domiciled funds that carry high tax risks.

Paasa provides direct access to the London Stock Exchange, allowing Indian investors to buy low-cost, tax-efficient UCITS ETFs directly from their phone.

Top UCITS ETFs

Here is a curated list of the most popular Accumulating (Acc) UCITS ETFs available to Indian investors.

These funds are domiciled in the EU, exempt from US Estate Tax, and automatically reinvest dividends to reduce taxes in India.

You can use our UCITS Screener to discover and compare more than 2,940 UCITS-compliant investment instruments.

About Paasa

Paasa is a global investing platform designed for Indian investors. We provide direct access to over 10 global exchanges, including the United States, United Kingdom, Switzerland, Hong Kong, Germany, France, Canada, Netherlands, Japan, and Singapore.

As Paasa provides direct access to European stock exchanges, you can buy both UCITS Mutual funds and UCITS ETFs on Paasa.

The Compliance Advantage

Paasa makes global investing easy and also removes the compliance friction with a specialized layer built specifically for Indian residents:

• Schedule FA Reporting: Exact reports you need for your Indian tax returns, eliminating the need for manual calculations.
• Tax Filing & Advice: Access to expert tax advice and seamless filing support.
• FEMA & LRS Integration: Guidance on FEMA regulations and LRS limits to ensure compliance.

Paasa also provides access to managed strategies, along with remittance, FEMA and tax advisory.

Disclaimer

This article is intended for information only and does not constitute investment, tax, or legal advice. The material is based on public sources and our interpretation of current market conditions, which may change. Investing in global markets entails risks, including currency risk, political risk, and market volatility. Please seek advice from qualified professionals before acting.