ETF Vs Mutual Fund

Exchange-Traded Funds (ETFs) and Mutual Funds are similar in a lot of ways and are even confused to be the same many times as they both are pooled funds. For new or alien investors, it gets very confusing at times to distinguish between the two.

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One major difference between the Exchange Traded Funds and Mutual Funds is that ETFs can be bought through brokerages and not through fund management companies as mutual funds do.

In this article, you will get a walkthrough of major differences between the ETFs and Mutual Funds that will help you understand them more.

What is Exchange Traded Fund (ETF)?

Exchange-Traded Funds hold assets such as stocks, bonds, and commodities, and are traded on the stock exchange. The ETF prices keep fluctuating throughout the day as a result they have fewer fees and high liquidity in comparison to mutual funds.

Exchange-Traded Funds can be used for:

  • Hedging
  • Arbitrage
  • Equitizing cash

Traded on the public stock exchange, ETFs can be transferred, sold, or bought easily on the daily basis.

Some key highlights of ETFs (Exchange Traded Funds) are as follows:

  • Buying and selling can be done marginally and shortly
  • As low as one share can be bought or sold as there is no investment limit
  • Transactions are made in real-time
  • Commission for broker paid for regular order is same as selling or buying of Exchange Traded Funds

What is Mutual Fund?

A pool of total accumulated amounts professionally managed by multiple investors is termed mutual funds. In broader terms, when various fund houses or AMCs (Asset Management Companies) come together to pool in the investments of numerous individuals or trusts to earn capital returns over a while, a mutual fund vehicle is formed. 

Mutual fund investment is one of the top growing investment options in India for individuals who expect decent returns on their capital investments over some time. Fund managers manage all the investments under any mutual fund.

Typically, there are two types of mutual funds:

  1. Open-ended funds:

    Under open-ended funds, the sale and purchase of funds are directly handled by the investors and fund companies. These funds are in domination in the mutual fund market.

  2. Close-ended funds:

    A limited number of shares are issued under the close-ended funds. The demand of the investor determines the price of the fund and not the Net Asset Value (NAV).

ETFs Vs Mutual Funds: The Difference

Let us compare the Exchange-Traded Funds and Mutual Funds to analyze the difference.

Exchange-Traded Funds (ETFs)

Mutual Funds (MF)

ETFs are listed on the exchanges

Mutual Funds are not listed on the exchanges

Trading is carried out during the trading day course

Trading is done at the closing of NAV (Net Asset Value)

Operational expenses are comparatively low

Operational expenses vary from low to high depending on the fund

The minimum investment is not specific. It can be as low as 1

They generally have specific minimum expense

Tax benefits are offered

There are tax liabilities

Transactions are made in real-time depending on the situational market price

Directly purchased from funds at a Net Asset Value price. It is fixed 

"Bid-ask Spread" is the additional cost while trading

Generally, the transaction cost is zero while buying and selling

It has high liquidity

It has low liquidity when compared to ETFs

There is no holding period. Buying and selling is done in real-time

In general, there is a minimum of 90 day period between buying and selling

The transaction is made through a Demat account

Demat account is not required

Decision Between ETFs and Mutual Funds

It is difficult to decide between Exchange Traded Funds and Mutual funds as both the investment options provide a great financial corpus in the future depending upon the kind of investments made.

Some common points to keep in mind before investing in any of the above-mentioned options are:

  • Investors personal risk appetite
  • Investors financial goals
  • Investors capacity to invest
  • The investment horizon
  • Future tax-saving and investments strategies

Final Words!

It is important to think about yourself, your needs, requirements, and your current financial standing before making any kind of investment for the future. While Exchange Traded Funds are flexible and offer high returns in the short term, Mutual Funds require long-term investments for a better financial corpus in the future.

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