How are ETFs different from Mutual Funds?

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.

Tagged With: exchange traded fundsmutual fundsstock marketasset allocationexpense ratio
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Related FAQs

Why are ETF or Exchange Traded Funds not popular in India?

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.

What is Mutual Fund Expense Ratio and how to calculate it?

The expense ratio in the case of mutual funds sector refers to the measure of the amount costs by an investment company for operating a mutual fund.

How do I find the latest NAV of a mutual fund?

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.

What are the charges in an ETF?

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.

What is Mirae Asset FANG Plus ETF?

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.

What is difference - Mutual Funds vs Index funds?

The differences between index funds and mutual funds are vast. Learn what is mutual fund and index fund and know what differentiates the two investment options.

Are ETFs only for stocks?

ETFs are a financial instrument made to track an underlying asset and provide similar returns based on the performance of the underlying. ETFs are listed on stock exchanges which make it easier to buy and sell at desired prices. ETFs are not only limited to stocks but cover a wide range of investment avenues like Commodities, Bonds, etc.

Can I trade or invest Rs 100 in the share market of India?

You can definitely trade or invest Rs 100 in Indian stock markets. There are no monetary requirements to enter the stock market hence you can buy any share that is trading under Rs 100. Apart from direct stock investing/ trading, there are some indirect ways to own shares over Rs 100. This can be done through Mutual Funds.

What is difference between Mutual funds and Hedge funds?

In a way, there are a lot of similarities between Mutual Funds and Hedge Funds. In the both types of investments, a group of investors pool their money and invest in different type of securities. The main misconception about the funds is that people think that they are similar and the terms are interchangeable. In reality, they are not same and there is a very thin line between them.

Are market highs good to invest in Equity mutual funds?

Understanding the relative position of the market, the absolute values do not matter much. What matters is what is the earnings multiple, currently the market is trading at, popularly captured by a metric called P/E ( Price to earnings).