How are ETFs different from Mutual Funds?
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- Updated On:24-May-2021
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Short Answer
ETFs (Exchange Traded Funds) and Mutual Funds are similar investment vehicles that provide the investors various features. Both have their benefits and shortcomings. ETFs are a good option for passive investors who want to invest in a particular Index or Sector without much rebalancing. On the other hand, Mutual Funds are a better option for active investors who are more active with their investments. One can switch between funds according to their current strategies.
Detailed Answer
What are ETFs & Mutual Funds?
ETFs and Mutual Funds are both investment vehicles that allow the investors to invest in certain asset classes directly or indirectly through them. ETFs and mutual funds collect money from the investors and invest that collected money towards the chosen securities. Let's understand both in detail.
Mutual Funds
Mutual Funds are an investment tool that collects money from the investors and buys securities with the collected money. As and when there is a gain or loss in those invested securities, it is passed on to the investors. Mutual funds are managed by a Fund manager who looks after the funds and makes all the buying and selling decisions to maximize the gains. For this, a small fee is charged from the investors in the form of an “Expense Ratio”.
ETF (Exchange Traded Funds)
ETFs are similar to mutual funds but with a twist. ETFs track the performance of an index, commodity, or a particular sector and gives the returns accordingly. ETFs are listed on stock exchanges which makes it easier to buy and sell at any given time within the market hours. ETFs are also managed by a Fund manager who makes sure that the ETF is accurately tracking the underlying.
Difference between an ETF & Mutual Fund
1. Expense ratio
Mutual Funds charge more expense ratios compared to ETFs. Mutual funds incur a lot of costs and taxes for frequent buying and selling of securities. This leads to an increase in the expense ratio. ETFs are cheaper as they are mostly passively managed and don’t require frequent buying & selling.
2. Listed on Stock Exchanges
As the name suggests ETFs (Exchange Traded Funds) are listed on Stock exchanges whereas Mutual Funds are not. Due to this buying and selling ETFs become more convenient. One can place a limit order while buying and selling the ETFs which is not possible in Mutual Funds.
3. Price Change
The price of ETFs changes every second in the Secondary markets as they are listed. On the other hand, mutual fund houses update their NAV (Net Asset Value) only at the end of the day. This makes the buying and selling of ETFs more flexible.
4. Liquidity
As ETFs are listed on stock exchanges one can only buy and sell them on the exchanges. Sometimes the order volume can be huge and there might not be that many buyers or sellers to execute the order. This moves the price due to a lack of liquidity in ETFs. On the other hand, Mutual Funds provide ample liquidity. Mutual Fund always keeps a part of the total capital aside for redemption. Hence no price fluctuation takes place even while buying and selling extremely large quantities.
5. Minimum Investment
The minimum investment is a major difference when it comes to Mutual Funds and ETFs. ETFs are like equity shares where an individual can buy a minimum of 1 share. Whereas Mutual Funds allot units to their investors based on the money invested. Mutual Funds usually have a higher minimum investment amount ranging from Rs 100 to Rs 5000 in some cases.
6. Active and Passively managed funds
Mutual funds are mostly actively managed funds where there is a team of experts behind them. ETFs are considered to be passive funds as they track a particular index or sector hence too many changes are not required. Due to this ETFs offer a lower cost compared to Mutual Funds.
Conclusion
By the following points, it must be clear that both are similar to some extent. Some differences make both of the investment vehicles unique in their own way. An active investor can choose a Mutual Fund whereas a Passive investor could choose an Index ETF.
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Discussion (0)
ETF is an investment instrument that tracks a group of securities from a particular asset class and performs according to it. It is managed by a Fund manager who makes sure that the ETF tracks the underlying asset accurately. ETFs are listed on the Stock Exchanges therefore one can buy & sell them within the market hours at their desired prices.
The Mirae Asset NYSE FANG Plus ETF Fund is a good option for Investors who want foreign exposure. The Equity allocation is very concentrated to just 10 stocks which makes this ETF very volatile and risky. This ETF consists of the top 10 stocks in their respective sectors mostly TECH, like Amazon, Netflix. Facebook, etc. Hence Investors with high-risk tolerance and a long time period should consider this fund.
ETFs are investment instruments that are listed on stock exchanges that offer investors to get exposure to a variety of asset classes. ETFs can be of different types tracking a particular asset class like Index, Commodity, and a particular sector. There are some changes in an ETF that include the Expense ratio and some other fixed charges charged by brokers, SEBI, etc.
ETFs (Exchange Traded Funds) & Mutual Funds are investment avenues that are managed by a Fund manager and allow Retail investors to invest in them. ETFs are listed on Stock Exchanges, and Mutual Funds are not. Usually, ETFs track an Index or sector whereas Mutual Funds offer a much more variety of Funds from which an investor can choose from. Both of these investment vehicles have their own merits and demerits. One should evaluate their risk profile and goals and choose one of them either. Find out which of these is the better option.
The NAV of a mutual fund is the total asset value divided by the combined number of units. You can find the latest NAV of any fund by simply searching the respective fund on a mutual fund platform. You will get all the details like NAV, performance, expense ratio, etc, by clicking on the fund.
Index funds are mutual funds in which investment are made in the stocks of Index they track such as Nifty, Sensex according to its composition and weightage of the index.
Exchange traded fund is a freely marketable security which tracks a particular index, commodity, bonds or combination of assets. they aren't popular as there is no additional tax incentives, not enough liquidity, under performs most of the time, lack of choices, lack of institutional interest, costs are low but not enough and lack of awareness.
Investors looking to invest in mutual funds without a Demat account can invest through financial institutions, independent financial advisors, AMC, and online portals.
You might have read about different stock brokers in India. Here I'll review two of the most popular discount brokers in India: 5Paisa v/s Zerodha Comparison.
Stoxkart is a safe and reliable brokerage house in India. Stoxkart is a SEBI registered broker and depository participant of CDSL to offer Demat account opening services to its clientele base.