ETFs and Mutual Funds

What are ETFs?

ETFs or Exchanged Traded Funds are index funds that are listed and traded on exchanges just like stocks. ETFs have created a whole new panorama of investment opportunities to institutional money managers as well as retails. The trading value of ETFs is based on the net asset value of the principal stocks that it represents. Though ETFs and mutual funds may look similar, there are differences between both of them.

Features of ETFs

ETFs are freely traded in the market and can be bought and sold as per the convenience of the investor. The market price is available in real-time just like the equity.

ETFs replicate the performance of an index and do not require active management and because of this the fees and expenses of ETF investments are comparatively less. 

Because ETFs are traded like any other shares on the exchange, investors are asked to pay commissions on sale and purchases of units as per the prevailing rules. 

ETF funds are tax-friendly when compared to mutual funds. Though both ETFs and mutual funds are put through capital gains tax and dividend taxes, the fee charged on ETFs is very much less than the one levied on mutual funds.   

How do Exchange Traded Funds Work?

ETFs share the features of both shares and mutual funds and are generally traded on an exchange. ETFs are listed on major stock exchanges and can be purchased and sold as per need during market hours. The costs of underlying assets present in the pool of resources are directly proportional to the changes in the shared price of an ETF. In other words, if the price of one or more assets increases, the share price of the ETF increases proportionately.

What are Mutual Funds?

Mutual funds are professionally managed investment schemes that collect money from various investors and then invest them in different holdings. Mutual funds are invested in a wide range of securities like bonds, stocks, debt instruments etc. Each scheme has a different Net Asset Value.

Features of Mutual Funds

Mutual funds are bought and sold only by placing a request with the fund house or through various platforms and aggregators.

You can buy Mutual Funds as a lump sum or do smaller investments at regular intervals.

In most Actively Managed Funds, the fund manager solely takes care of the investment decisions on behalf of the investors and because of this, the expenses of Mutual funds are quite higher.

Mutual funds have a wide range of fund strategies to meet an investor’s individual desired goals.
Mutual funds can be specialized and help investors to make smaller sized investments in Financial Markets without having to do extensive research on individual securities.
Mutual Funds give exposure to professional management, research and expertise to an average investor, which could otherwise prove inaccessible and costly for most.

How Do Mutual Funds Work?

Mutual funds are pooled investment vehicles that collect money from the investors to invest on their behalf in stocks, bonds and and other assets. While doing this they charge a fee for managing the investor’s money. Mutual funds also allow the investors to invest in portfolios that you can’t afford to do alone because you are investing along with the other investors.

 

Difference between ETFs and Mutual Funds

  • Mutual funds are traded at the closing NAV (net asset value) whereas ETFs are traded during the course of a trading day and its value varies during this time.
  • Mutual funds have varying operating expenses whereas ETFs have much lower expenses due to their generally passive nature.
  • ETFs are much more tax efficient compared to Mutual Funds.
  • Mutual fund shares can only be purchased directly from the funds at the Net Asset Value (NAV) price that is fixed during the day of trading whereas ETFs can be bought and sold anytime on the stock exchange they are listed on.

Bottom Line

Every portfolio should have a mix of both Active and Passive strategies. ETFs and Mutual Funds are ideal vehicles for investors to take exposure in the Financial Markets. They both can help achieve diversification and risk mitigation through their varying strategies.This way a client gets exposed to markets, can take advantage of the superior return potential of financial markets and access professional management for their money.