Is it better to buy ETFs or Mutual Funds?

Short Answer

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.

Detailed Answer

ETFs and Mutual Funds are both investment tools that collect money from the investors and invest it accordingly. There are some differences between ETFs and Mutual Funds, let's look at them in detail.

Mutual Funds

Mutual Funds are funds that collect money from the investors and use that money to buy securities from the market. This is done on behalf of the investors and whatever Gain or loss is incurred in the process, the fund house passes it on to its investors. While doing so a Mutual Fund charges a nominal fee for its services in the form of an Expense Ratio which is charged by the customers of that Fund.

ETF (Exchange-Traded Fund)

ETFs are also similar to Mutual Funds to some extent but not completely. ETFs usually track an index or a particular sector where not much rebalancing or buying & selling is required. ETFs that track an Index pass on the same return as the Index at a minimum Expense Ratio. The expense ratio on ETFs is lower compared to Mutual Funds as ETFs are mostly passive funds where to overhead costs are less.

Which of them Better for Investors?

Both investment vehicles have their own pros and cons. An individual should identify their requirements and Risk profile before investing in either of them. This question could be answered in 2 different perspectives of investment.

  • Active Investor- An active investor is a person who is actively tracking the markets and wants to invest in a concentrated sector or a group of stocks. For them, Mutual Funds could be a good option, as there are many types of funds available out there. There are sector-specific funds like Pharma, Auto, etc. These kinds of funds diversify their investments into various stocks of that specific sector making the risk minimum.
  • Passive Investor- Passive Investors are investors who don’t track the markets regularly, or want to rebalance their portfolio too often. For passive investors, ETFs can be a good option because ETFs mostly track index or sectors and are low-cost compared to Mutual Funds. The risk is comparatively less than focused mutual funds as an Index ETF tracks the broader Index rather than a sector. The cost of an ETF is also low compared to Mutual Funds.

Some other Differences between a Mutual Fund & ETF

  • Cost- The cost or the Expense ratio charged by ETFs is less than Mutual Funds. This is because ETFs simply track the underlying asset hence the overhead costs are low.
  • Minimum Investment- The minimum investment in an ETF is the price of 1 ETF whereas some Mutual Funds have their minimum limit at 1000 to 5000 rupees which can be high for some investors.

Conclusion

Considering the above points one can easily find out which type of Fund suits their requirements. One should also assess their Risk profile before choosing the type of ETFs or Mutual Funds. To make an ideal portfolio one should ensure that there is proper diversification. There should be a mixture of Debt and Equity in every portfolio so that, one is protected by the market downside with their Debt allocation.

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Related FAQs

Which is better investing in equity, mutual funds, or keeping money in banks?

Equity and mutual funds are perfect if you want to invest in companies while seeing your money grow in a short period. Moreover, the chances of compounding your investments are higher. But the risk associated is equally greater considering the growth of companies and their performance in offering returns. But then keeping money in the bank is the safest way to keep your earnings. But then, due to inflation and low returns on interest, that value of the money kept might be cut down drastically.

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.

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).

How are ETFs different from Mutual Funds?

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.

Which is better FD vs. Mutual Fund vs. Real Estate Investment?

FD vs Mutual Fund vs Real Estate Investment has its advantages in terms of how much you invest and your investing period. Longer the period, higher the returns.

How can NRIs from the United States invest in Mutual Funds in India?

NRIs living in the United States can invest in Indian Mutual Funds, but there are some hassles that have to be overcome. You will require an NRE, NRO, or FCRN account in order to convert the foreign currency into Indian rupees, post which you can complete the KYC and begin investing in Indian Mutual Funds.

Which is better Zerodha or Groww for Mutual Funds?

Zerodha as well as Groww, both allow investors to invest in Mutual funds. Groww does not charge any Account opening fees or Annual maintenance Charges but Zerodha charges Rs 200 for Account opening and Rs 300 for AMC. This makes Groww a cheaper and better option when it comes to investing in mutual funds.

What are the advantages and disadvantages of investing in Fund of Funds?

Fund of Funds has some key advantages such as High Diversification, Low volatility, High accessibility, etc. On the other hand, it also has some drawbacks which include a High Expense ratio, low transparency, and Mediocre returns.

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.

How to invest in mutual funds with or without demat account?

Investors looking to invest in mutual funds without a Demat account can invest through financial institutions, independent financial advisors, AMC, and online portals.