Some believe that if it looks like an online mutual fund, behaves like a mutual fund, and runs like a mutual fund, it could be an ETF. Let’s examine whether that’s true with this blog on ETF Vs Mutual Fund.
What are Mutual Funds?
A mutual fund is a financial instrument that pools together funds from investors. This pool of money is invested in various financial assets like stocks and bonds.
The decision of where to invest the money depends on the fund manager who is typically an experienced market professional. But they’re not alone. There’s a team that assists the fund manager in most cases.
Their expertise means that investors’ money is diversified across stocks, bonds, and at times, even cash. After all, the goal of a mutual fund is to provide investors with a way to access a broad range of assets within a single investment.
All of this makes mutual funds a potentially desirable investment. What’s more, you can invest in a mutual fund at any time as it is not listed on a stock market.
How stock market works in India is that it operates for a set duration of time. But mutual funds allow you to invest any time, anywhere. That said, mutual fund units are allocated slightly differently. We’ll talk about that in a future blog.
Now that you understand mutual funds, you might be wondering ‘are ETFs mutual funds?’ Read on to learn.
What are ETFs?
First, let us answer the question we asked in the last section. No, ETFs are not mutual funds. At least not entirely. ETFs are similar to mutual funds in the way that they also offer investors an avenue to invest in a diversified portfolio of financial assets.
ETFs are another type of ‘pooled’ investment that track an index, a basket of securities, commodities, or bonds. ETFs are different from mutual funds as they can be traded like individual stocks on a stock exchange.
In India, ETFs are listed on stock exchanges like NSE and BSE. Thus, when you buy an ETF, you can expect more or less the same returns as the underlying index as the ETF will mirror the returns of its native index.
Instead of trying to beat the market, the best ETFs in India try to replicate the index returns. Now that we know the basics, what are the key differences between ETFs and mutual funds? Let’s learn.
ETF vs Mutual fund: Key Differences
ETFs and mutual funds differ in several aspects. Some key differences are mentioned below.
1. Method of Management
Both ETFs and mutual funds can be ‘actively’ and ‘passively’ managed. However, most ETFs follow a passive investment approach i.e., they are pegged to a particular index and hence, mimic its performance.
Read 👉 Are ETFs Good for Beginners?
Fund managers only make periodic adjustments to keep the fund aligned with the index.
Mutual funds, for the most part, are active investments managed by fund managers. That means fund managers make active decisions such as buying, selling, or holding securities with the aim of gaining better returns.
However, a type of mutual fund scheme known as index funds is similar to ETFs because their underlying portfolio mirrors indices like Nifty 50.
2. Cost of Investment
Typically, the portfolio management fee and other costs in ETFs are lower compared to mutual funds. This is because ETFs do not require a high degree of portfolio management services, as they are passive investments.
In the case of mutual funds, the investment expenses are higher as it requires professional portfolio management. In fact, the fee mentioned in the expense ratio and load in mutual funds acts as a deciding factor for many while choosing mutual funds.
A higher expense ratio indicates higher fund management fees and vice versa.
Read 👉 Active Vs Passive Investing
3. Method of Trading
ETFs are traded in the same way as stocks and within similar stock market holidays and hours. In India, the equity market functions from 9:15 am to 3:30 pm. The price of an ETF keeps fluctuating throughout the day according to its demand.
Contrary to ETFs, mutual funds can only be bought or sold at any time. However, the price of purchase/sell which is known as the Net Asset Value (NAV) gets fixed every day.
The same price is applied for all transactions based on the cut-off time. Moreover, all investors will receive the order at the same price if they buy or sell on the same day.
ETF Vs Mutual Fund: Which is Better?
The answer to this question depends on your individual investment goals and risk profile. If you’re looking for a hands-off approach to investing and are comfortable with paying slightly higher fees, a mutual fund can be better for you.
On the other hand, if you’re looking for a low-cost investment vehicle that offers quicker liquidity, an ETF might be more suited. Ultimately, the best choice will depend on your specific financial goals and risk appetite.
For example, someone investing in their early 30s would be better suited to handle the risk profile of both mutual funds and ETFs. Whereas someone in their 60s may not be able to invest in either.
Either way, it is crucial to undertake research and understand the investment options before making a decision. The following table can help you visualize the differences between ETFs and mutual funds.
|Available On||Stock Exchange||AMCs and Mutual Fund App|
|Investment Type||Passive||Active or Passive|
|Underlying||Index||Index or Basket of Stocks|
We can conclude the debate of Etf Vs Mutual Fund by saying two things:
- ETFs and mutual funds have their own pros and cons
- ETFs may behave like mutual funds but are traded on a stock exchange
The choice between ETFs and mutual funds depends purely on your investment goal, risk tolerance, and capital at hand.
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