Exchange-traded funds (ETFs) and mutual funds are popular ways to invest in India. Both help you invest in a mix of different stocks and other securities.
ETFs follow a specific market index or asset, while mutual funds are managed by professionals who try to beat the market.
Both options are usually low-cost and offer diversification. The key difference is that ETFs are bought and sold on stock exchanges like regular stocks, while mutual funds are bought and sold through a fund company at the end of the day based on their value.
Think about your investment goals and how much risk you can handle when choosing between ETFs and mutual funds.
Table of Contents
ETF
An Exchange Traded Fund or ETF is a type of investment fund that is traded on the stock exchange. The securities that come under the ETF are commodities, stocks, and bonds. These are traded for the securities that come under commodities, stocks, and bonds.
These are traded for an amount nearer to the actual total asset value of the asset, on the trading day. A bond index or stock index is traced by most of the ETFs. The price of the ETF can carry all the day.
Generally, ETFs have much lower fees and higher daily liquidity if set side by side to mutual fund shares. ETF can be utilized for objectives like Hedging, Equitizing Cash, and for Arbitrage.
ETF shareowners get a small part of the earned profits, which means the dividends paid and interest obtained. They may also receive the value which is remaining if there is liquidation of the fund.
ETF shares are generally traded on public stock exchanges, therefore these sorts of shares can be transferred, bought, or sold without any hassle like the shares of stock.
ETF supply takes place via creation and redemption procedures that include some unique investors, also known as authorized participants (APs). APs are usually well-to-do financial institutions like banks and investment companies that have a good capacity for buying.
The advantages of ETFs are discussed in the following:
- Investors can sell stocks they don’t own yet (known as “selling short”) or borrow money to buy more stocks (known as “buying on margin”). They are also allowed to buy one share, as there is no minimum investment needed.
- The commission that is paid to the broker while purchasing or selling ETFs is the same as that paid for regular orders.
- It is comparable to a mutual fund that can be bought and sold at a cost that varies throughout the day. The transactions are conducted in real as well.
Mutual Fund
A mutual fund is an investment medium that is created by a pool of money gathered from different investors to invest in different asset classes such as stocks, bonds, money market instruments, and other sorts of assets. Mutual funds are managed by a skilled professional who distributes the fund’s assets and endeavours to gain capital or income for the fund’s investors. A mutual fund’s portfolio is made and maintained to meet the investment goals mentioned in its prospectus.
Mutual funds provide access to each investor to manage portfolios of equities, bonds, and other securities. So, each shareowner takes part proportionally in the profit or loss of the fund. Mutual funds invest in many different assets. To see how well the fund is doing, people usually look at the change in the fund’s total value, which reflects how the individual investments within the fund are performing.
Mutual Funds vs ETF: The Difference
| Basis | Mutual Funds | ETFs |
| Trading Value | Traded at the end of the day based on NAV (Net Asset Value) | Traded throughout the day at changing market prices |
| Operating Fees | Slightly higher | Lower expenses |
| Minimum Investment | Requires a minimum investment | No minimum requirement |
| Taxation | May have tax liabilities | Often more tax-efficient |
| Transaction Costs | Mutual Funds have higher transaction costs when compared to ETF | Lower transaction costs than mutual funds. |
| Selling Time Limit | May have penalties for selling within a fixed period | No time limit for buying or selling |
| Management | Can be actively managed passively managed | Generally track indexes (passive management) |
ETF and Mutual Fund Similarities
| Feature | ETFs and Mutual Funds |
| Diversification | Both ETFs and mutual funds invest in a variety of different securities, like stocks and bonds, to spread out risk. |
| Management | Both are managed by financial experts. They can be actively managed (where managers pick investments) or passively managed (where they follow an index). |
| Types of Assets | Both offer access to various types of investments, including stocks, bonds, commodities, and sometimes a mix of these. |
ETFs vs Mutual Funds: Which One To Choose
ETFs (Exchange-Traded Funds):
- Trade like stocks: Buy or sell anytime during market hours.
- Lower fees: Usually cheaper than mutual funds.
- Flexible: Good if you want to trade often or need quick access to your money.
Mutual Funds:
- Professional management: Managed by experts.
- Higher fees: Usually more expensive than ETFs.
- Long-term investment: Good for a steady, hands-off approach.
How to Choose:
- If you want lower fees and can handle real-time trading, ETFs might be better.
- If you prefer simplicity and are okay with potentially higher fees, mutual funds might be better.
Remember to consider your investment goals, time horizon, and risk tolerance, and consult a financial advisor to make the best choice for your situation!
Final Words
ETFs and mutuals have so many similar properties but they possess some differences as well. ETFs generally have a lower fee and can be traded like intraday stocks. While the diversified property of both mutual funds and ETFs can make them attractive to investors who want fewer risks, they still come with market risks that investors should understand before investing.
Do you have any questions about the ETFs and Mutual Funds? Tell us in the comment section!
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Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.
