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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Discussion (1)
    I think it is better to stick to mutual funds instead of ETFs. Price deviation between ETFs and its real price can be huge at any time and this means that you will get poor price discovery.
Related FAQs
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.

How does an ETF work?

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.

Can a retail investor buy Government Securities?

Government securities include both T-Bills (Treasury Bills) and Government bonds which are both short and long-term instruments issued by the Central & State governments for various purposes. Retail investors are allowed to invest in G-Secs provided by the RBI. One can buy them directly from the Stock exchanges in a non-competitive method.

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.

What is the concept of 'Buy the Dip', Should you apply it?

Buy the Dip represent an investing strategy wherein you add on to your existing investments in the case of any small or major market correction. This strategy is beneficial for long-term investments as it helps to reduce the overall cost and also increases the overall profitability.

What are Liquid Funds? Meaning & Details

Liquid funds, a type of mutual funds which invest in different money market instruments. The withdrawals from these funds are processed within 24 hours and that's why these are regarded as liquid assets. The fund manager gets flexibility to meet immediate redemption requests.

How to get exposure in U.S stocks?

Investing in abroad markets has become quite easy these days. One can get direct and indirect exposure into the U.S. market through various methods. Investing in foreign markets like the U.S provides many benefits like Diversification into the top companies of the world, Benefit of Currency Depreciation, etc. Apart from directly purchasing the stocks listed on the U.S. stock exchanges, there are some different methods as well. Know the best methods of getting exposure to the U.S. stock markets.

How to Invest in Index Funds in India?

There are several options to invest in index funds. It can be done through online portals, agents, demat account and AMC website.

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.

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.

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