It is well-known that investments are the way to grow your wealth. And with many options available, navigating the investment landscape can feel overwhelming. Two prominent choices that often spark debate among investors are Exchange-Traded Funds (ETFs) and Mutual Funds. Both offer compelling features and cater to diverse investment objectives. But, which one is right for you? To answer that, you must know the primary differences between mutual funds and ETFs. In this article, learn about ETF vs Mutual Funds and their similarities.
What Is an ETF?
An Exchange-Traded Fund is like a basket of stocks or bonds you can buy and sell on the stock exchange, just like an individual stock. ETFs offer diversification by holding various assets and tracking an index, commodity, or specific sector. They provide investors with a cost-effective and flexible way to gain exposure to different markets without buying each underlying asset separately.
What Is a Mutual Fund?
A Mutual Fund pools money from several investors and invests it in a diversified portfolio of stocks, bonds, or other securities. Professional fund managers manage these funds and offer a simple way for individuals to access a broad range of assets. Investors buy assets in the mutual fund, and the performance of its underlying assets determines the fund’s value. Mutual funds are designed to cater to various investment goals and risk tolerances.
Read More About What is Mutual Fund?
ETFs vs Mutual Funds
|Structure and Trading
|Traded on stock exchanges throughout the day.
|Bought or sold at the end of the trading day through the fund company.
|Can be passively managed (tracking an index) or actively managed.
|Can be actively or passively managed, often with professional fund managers.
|Generally, investors can buy as little as one share.
|Minimum investment requirements set by the fund company.
|Often lower expense ratios due to passive management and lower turnover.
|Expense ratios can vary and may be higher due to active management.
|Intraday trading flexibility.
|Trades are executed at the end of the trading day at the NAV.
|Offers diversification by holding a basket of assets.
|Provides diversification through a portfolio of various securities.
Similarities Between Mutual Funds and ETFs
Though ETFs and Mutual Funds are two different investment options, there are a few similarities between them, as follows:
- Diversification: Both Mutual Funds and ETFs pool money from several investors and create a diversified portfolio of stocks and other securities. This diversification helps spread risk across different assets.
- Professional Management: Both investment vehicles are managed by professionals (fund managers) responsible for making investment decisions. The managers aim to achieve the fund’s stated objectives and maximise returns for investors.
- Investor Access: Mutual Funds and ETFs offer investors entry to a broad range of assets and markets that may be challenging to access individually. This accessibility is particularly beneficial for investors with limited capital.
- Redemption Process: Both typically offer a redemption process, where investors can sell their shares back to the fund. The redemption process ensures liquidity for investors who want to exit their investments.
- Ownership through Shares: Investors in both Mutual Funds and ETFs own shares of the fund. The value of these shares is tied to the underlying assets’ performance held by the fund.
- Dividends and Income: Both can generate income for investors through dividends and interest earned from the underlying securities. Investors can either reinvest the dividends back into the fund or get them as cash.
ETF vs Mutual Fund – Which Is Better?
Deciding whether ETFs or Mutual Funds are better depends on individual investor preferences, goals, and the desired investment approach. Here are key considerations:
ETFs may be preferable if you are looking for:
- Lower Costs: ETFs often have lower expense ratios, making them cost-effective for investors.
- Intraday Trading: The ability to buy and sell throughout the trading day at market prices is essential.
- Tax Efficiency: ETFs may offer greater tax efficiency due to the in-kind creation/redemption process.
Mutual Funds may be preferable if:
- Automatic Investment Plans: For investors looking to set up automatic investment plans, mutual funds might be more suitable.
- Fractional Shares: Mutual Funds allow investors to purchase fractional shares, accommodating smaller investment amounts.
- Managed Diversification: If investors prefer professional management without the need for intraday trading flexibility.
Overall, the “better” choice depends on individual financial objectives and preferences, and a diversified portfolio may even include both ETFs and Mutual Funds for optimal balance.
Both mutual funds and ETFs have their advantages and disadvantages. As an investor, you need to be aware of the workings of each investment before making a choice. Talk to your financial advisor for a clear understanding. Open a Demat Account on Angel One today and start exploring various prominent investments, such as stocks, mutual funds, SIPs, and more.
What is ETF vs Mutual Fund vs Index Fund?
ETFs and Mutual Funds pool money from investors, but ETFs trade on exchanges like stocks, while Mutual Funds are bought or sold through the fund company. Index Funds are a type of Mutual Fund or ETF designed to mimic a specific market index.
What is the taxation on ETFs and Mutual Funds in India?
In India, both ETFs and Mutual Funds are subject to capital gains tax. The holding period determines whether gains are short-term or long-term, affecting tax rates.
Can I sell an ETF at any time?
Yes, ETFs can be bought or sold on stock exchanges at any time during market hours, offering intraday trading flexibility to investors.
Which is more cost-effective, ETFs or Mutual Funds?
Generally, ETFs have lower expense ratios than Mutual Funds, making them more cost-effective for investors.
Do ETFs pay dividends?
Yes, most ETFs pay dividends if they hold stocks that pay dividends. These dividends are typically paid quarterly or annually and can be received as cash or reinvested into additional ETF shares. However, some ETFs, like those focused on bonds or specific strategies, may not pay dividends. Always check the ETF’s specific details to confirm its dividend payout policy.