Category : New to Investing August 21, 20245 minutes read
A mutual fund is an investment consisting of a portfolio of stocks, bonds or other securities. An ETF is an investment fund that is traded on the stock exchange and follows a particular index. These investment schemes provide an entry point to diverse portfolios, enabling people to make investments in stocks and bonds, among other assets. Beneath this seemingly shared aim, though, are several unique traits that differentiate mutual funds and ETFs. In this guide, we compare ETFs vs mutual funds and provide investors with the information they need to make wise choices.
The risk comparison in ETF vs Mutual Fund ETF vs Mutual Fund: The amount of risk varies depending on the Mutual Funds and ETFs; nevertheless, because of intraday trading possibilities and market volatility, ETFs might carry a higher risk.
Although it is rare, ETFs might suffer large losses; nonetheless, their diversity helps them to hold onto value.
Some ETFs may offer an option for SIP in India. However, usually investors invest in ETFs in lumpsum.
The primary difference lies in their structure: ETFs trade on stock exchanges like stocks, while mutual funds are bought and sold through the fund company at the end of the trading day at the Net Asset Value (NAV).
ETFs, or exchange-traded funds, have become a popular investment option for a wide range of investors. Because of their cost-effectiveness, liquidity, and diversification, exchange-traded funds (ETFs) are positioned as a flexible and affordable option for investors with a range of financial objectives and risk tolerances.
Yes, many ETFs pay dividends. The specific dividend policy of an ETF depends on the underlying assets it holds.
Yes, a lot of mutual funds also distribute dividends. Mutual fund dividends are paid out of the revenue produced by the securities in the fund’s portfolio.
Introduction
Let’s look into the concept of mutual funds and ETFs individually and do a side-by-side comparison of ETFs vs Mutual Funds!
A mutual fund collects money from its investors to further invest in stocks, bonds, money market instruments etc. Different mutual funds have different goals and investment strategies. Some mutual funds aim to help investors create wealth in the long term, whereas other mutual funds may serve as a short-term investment for investors to park their funds. The portfolio of the fund is carefully arranged and modified in accordance with the investment goals specified in its prospectus.
An exchange-traded fund (ETF) functions similarly to a mutual fund, representing a pooled investment security. Usually mirroring a specific index, sector, commodity, or other assets, ETFs distinguish themselves from mutual funds by being tradable on stock exchanges, akin to regular stocks. ETF structures can range from tracking the price of a single commodity to a comprehensive assortment of securities, and they can even be tailored to follow specific investment strategies.
In order to compare ETFs vs mutual funds, we need to understand what ETFs are and how they work.
An investment vehicle that is intended to mimic an index is called an exchange-traded fund, or ETF. Because the fund’s shares are listed on stock exchanges, investors can invest or redeem their investment during trading hours at the going rate in the market. This feature gives investors flexibility throughout the trading day by enabling “intra-day” trading.
True to their name, Exchange Traded Funds (ETFs) are tradable on stock exchanges, similar to stocks. For instance, a NIFTY 50 ETF, mirroring the Nifty 50 Index, can be listed and traded on either or both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
Types of ETFs
Different types of ETFs invest in different asset classes and may have varied features.
Equity ETFs
These provide investors access to a variety of equities by tracking the performance of a certain equity market index.
Fixed Income ETFs
These give investors access to the bond market with the flexibility and liquidity of an exchange-traded fund.
Commodity ETFs
These provide investors access to the commodity markets by tracking the prices of goods including gold, silver, oil, and agricultural items.
Currency ETFs
These provide investors exposure to foreign exchange markets by tracking the value of a particular currency or a basket of currencies.
Gold ETFs
An exchange-traded fund (ETF) called Gold ETF seeks to replicate the price of actual gold in the country. These are passive financial products that invest in gold bullion and are based on gold prices.
These categories let investors customise their investments based on their goals and their portfolios.
ETF Benefits:
ETFs can have several benefits including:
Cost-effective
ETFs aim to provide a reasonably priced means of obtaining diversified market exposure. Investors gain from collective investments’ lesser transaction costs and scale management. Investors may gain varied market exposure with only one trade. The majority of ETFs, though not all of them, use passive index-tracking techniques, which affects the amount of management fees that they charge.
Transparency
ETFs offer transparency with regard to unit pricing and a defined investing purpose. Some investors find that trading continuously helps them make better decisions, particularly in times of market volatility.
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An Exchange-Traded Fund or ETF mimics the performance of an underlying index. The fund’s shares are listed on the stock exchange and investors may directly invest or redeem their investments during trading hours. Different types of ETFs invest in different assets. The types of ETFs may include, equity ETFs, fixed-income ETFs, commodity ETFs, currency ETFs, and gold ETFs. Exchange-Traded Funds are cost-effective and transparent, making them potentially beneficial for investors.
Understanding what a mutual fund is crucial when comparing ETFs vs mutual funds accurately. A mutual fund is a trust created to collect money from the general public and invest it in securities under different schemes, according to SEBI Regulations, 1996. Mutual funds combine the resources of several investors and issue units for money market and capital market assets, such as bonds, debentures, and stocks, as well as commercial paper, certificates of deposit, and Treasury bonds. The Securities and Exchange Board of India (SEBI) mandates that mutual funds in India provide a minimum investment in mutual fund of value of Rs. 500 for Systematic Investment Plans (SIPs) and Rs. 100 for lumpsum deposits. Certain mutual funds could have a higher minimum investment in mutual fund requirements.
A mutual fund is a type of trust that pools the money of several investors for a common financial goal. Investors invest in units of a particular Mutual Fund scheme, each with a well-defined investment objective and plan. After the money has been gathered, it is invested in securities that are in line with the regulation and have the potential to meet the investment goals of the scheme. Essentially, mutual funds provide investors the chance to participate in a diversified, professionally managed portfolio of assets.
Kinds of Mutual Funds by Structure:
Mutual funds can be distinguished by their structure. These include:
Open Ended Mutual Funds
These schemes don’t have a specified maturity date, therefore units can be bought and sold at any time at a price that corresponds to the net asset value (NAV). Liquidity is provided by open ended mutual funds, which let investors buy or sell units whenever they choose.
Close Ended Mutual Funds
Closed Ended Mutual Funds have a defined maturity period and sell a certain number of units all at once during the first offer period. Investors can only invest during the initial phase of the launch called NFO (New Fund Offering). By permitting the repurchase of units at NAV-related prices through recurring listings on stock exchanges, certain closed-ended funds provide an exit strategy.
Benefits of Mutual Funds:
Investing in mutual funds may be beneficial for investors. The following are the benefits of mutual funds:
Diversified Mutual Fund
A diversified mutual fund makes it possible for investors to diversify their holdings across a range of asset types, such as bonds, stocks, commodities, and more. Because of their flexibility, mutual funds may be a useful instrument for diversifying portfolios and efficiently managing risk.
Liquidity
On every business day, investors are able to purchase or sell mutual fund units at the Net Asset Value (NAV). Because of the liquidity this offers, investors may quickly access their money.
Rupee Cost Averaging
Investors who regularly invest through systematic investment plans (SIPs) can invest in more units at low prices and fewer units at high prices. The cost of investments is gradually averaged out with the use of this methodical strategy.
Systematic Investment Plans (SIP)
SIPs encourage disciplined investing by enabling investors to set monthly investments. This tactic, which averages the purchase price over time, helps mitigate market volatility.
Learn more about the benefits of SIP!
Transparency
Mutual funds disclose their holdings, performance, and other pertinent information in an open and transparent manner. Based on the fund’s performance history and portfolio specifics, investors may make informed decisions.
Now that you are acquainted with mutual funds and ETFs, the question that persists is what is the difference between ETF and mutual fund?
Gain the potential benefits of Rupee Cost Averaging by investing in mutual funds.
Mutual funds combine the resources of several investors and issue units for money market and capital market assets, such as bonds, debentures, and stocks, as well as commercial paper, certificates of deposit, and treasury bonds. Mutual funds can broadly be divided into two types: open-ended and close ended funds. Mutual funds offer several benefits including diversification and liquidity. Investors may choose to invest in mutual funds via Systematic Investment Plans (SIP) which may give them the benefits of Rupee Cost Averaging. Lastly, mutual funds are mandated to disclose their holdings, performance, and other information, allowing transparency and ensuring investors have access to relevant information.
The question, what is the difference between an ETF and a mutual fund may have occurred to you by now? Find below a table that delves into ETFs vs. mutual funds to simplify this.
| Key Points | ETFs | Mutual Funds |
| Management fees | While comparing mutual funds and ETFs, most ETFs have lesser management fees than mutual funds that are actively managed. | The management fee of a mutual fund may be relatively higher. |
| Investment approach | ETFs operate on a passive management approach, mirroring specific indices, thereby potentially reducing risk and ensuring transparency in the fund’s performance. | Most mutual funds use an active management strategy. |
| Taxation | ETFs have a reduced capital gains tax, making them more tax-efficient. | Considering ETFs vs. Mutual Funds, Mutual funds do not save as much on taxes. |
| Diversification | Exchange-Traded Funds (ETFs) provide diversification strategies by offering more targeted investment options that closely replicate specific indices. This means investors can hone in on particular sectors, themes, or market segments with precision. | Mutual funds present investors with extensive diversification options and exposure to a broader array of securities. These funds pool resources from various investors to invest in a diversified portfolio, encompassing a mix of stocks, bonds, and other financial instruments. |
| Risk | In general, less risk because of indexing or passive tracking. | May entail an increased risk. |
| SIP option | Rarely available | Available |
Further, if you seek to invest in gold, Gold ETFs or Gold Mutual Funds may be a suitable investment option. While both gold exchange-traded funds (ETFs) and gold mutual funds (GMFs) offer exposure to the precious metal, their trading strategies and organizational designs are different. Here is the difference between gold ETF and gold mutual fund:
| Gold ETF | Gold Mutual Fund |
| Traded on stock exchanges and provide intraday trading flexibility and often lower expense ratios, making them more accessible to smaller investors | GMFs are exchanged through the fund firm at the end of the day and frequently have minimum investment requirements |
A number of variables, including trading inclinations, investment objectives, and cost concerns, influence an investor’s decision between gold MF vs gold ETF.
- What is Mutual Fund? A Mutual Fund is a trust created to collect money from the general public and invest it in securities under different schemes.
- Some ETF benefits are: ETFs provide transparent and cost-effective access to diverse assets through a single trade, making them an efficient choice for investors seeking simplicity and flexibility in managing risk and gaining market exposure.
- Difference between gold ETF and gold mutual fund: While both gold exchange-traded funds (ETFs) and gold mutual funds (GMFs) offer exposure to the precious metal, their trading strategies and organizational designs are different.
- Choosing between a gold ETF vs mutual fund involves weighing factors like liquidity, expenses, and investment structure to align with your investment goals.
- When comparing ETF vs Mutual Fund, ETFs are generally less expensive than actively managed mutual funds, with lower management fees. Mutual fund management fees may be expressed as a percentage of the assets under management.
- In terms of taxation of ETF vs Mutual Fund, ETFs often have reduced capital gains tax, enhancing their tax efficiency. Mutual funds may not offer as much tax savings when compared to ETFs.
