Protecting your financial future is one of the most crucial steps you can do to ensure you have sufficient funds. Depending on your financial objectives, you can invest your money in a variety of ways to ensure a high return on your investment. Exchange-traded funds (ETFs) and mutual funds are two of the most popular investment vehicles for Indian investors. Let us understand difference between ETF and mutual fund in this topic.
Even though they appear similar at first glance, they are actually fairly distinct upon closer inspection. To make an informed decision on where to invest your money, you must understand how the two forms of investments differ.
What are ETFs?
Passively managed Exchange Traded Funds (ETFs) are those that track an index and do not require active management. Typically, these funds purchase the same number of equities as the index they track.
A fund manager does not oversee the daily operations of an exchange-traded fund (ETF). It just maintains track of the index’s position. ETFs are mutual funds that can be bought and sold on a stock exchange at any time.
What are Mutual Funds?
Mutual funds can be viewed as professionally managed investment programmes that combine the capital of a number of investors and invest it in a variety of assets with varying degrees of risk. The holdings of mutual funds extend beyond stocks and bonds.
In addition, they possess various financial instruments, such as notes and other forms of debt. The Net Asset Value (NAV) of a mutual fund can be calculated by dividing the total amount invested by the number of investors. You can also read different types of mutual funds schemes which you can think for your investment.
Difference Between ETF and Mutual Fund
The choice between mutual funds and exchange-traded funds is one of the most difficult decisions investors must make (ETF). On the surface, these two goods appear to be comparable. However, they have significant differences. Here are some of the most significant difference between ETF and mutual fund are as follows.
Management
The majority of mutual funds are actively manage by an experienced fund manager who makes all investment decisions on the customers behalf. Unlike mutual funds, exchange-traded funds (ETFs) are not actively manage.
They simply track the performance of a market index. Actively managed ETFs must have a higher expense ratio than passively managed ETFs.
Lock-in Period
There is no required minimum holding period for exchange-traded funds (ETFs), allowing investors to sell their shares whenever they choose. Some mutual funds, such as the ELSS, have a standard three-year lock-in term (Equity Linked Savings Scheme).
During this period, the investment is unavailable for sale. This could take anywhere from nine days to three years, depending on the mutual fund’s structure.
Flexibility
Investors can buy and sell ETFs on the open market at their discretion, based on their investment objectives. The market price of these instruments is readily available in real time, just as it is for regular stock shares.
If you wish to purchase or sell units of a mutual fund, you must submit a request to the fund house. The net asset value of a mutual fund indicates the cost of a single share (NAV).
Costs Incurred by the Organisation
ETFs do not require active management because they simply replicate the performance of an index. Consequently, the costs and fees associated with investing in ETFs are not excessively high. Mutual fund investors have input over how their money is invest by the fund’s managers. As a result, the cost of managing funds increases.
Commissions
ETF units are exchange on the stock exchange like any other stock, therefore investors must pay commissions when purchasing or selling ETF units. In contrast, mutual funds can be held as investments without incurring transaction costs.
How to Decide Between ETF and Mutual Fund?
If you wish to diversify your investment portfolio, the two solutions listed above are both excellent options. There are numerous factors to consider while determining difference between ETF and mutual fund which choice to pursue, including:
- Because of your financial plans.
- How simple it is to withdraw your money from the investment.
- How at ease you are with taking risks
- By utilising a method to avoid paying taxes similar to yours.
- As an investor, you view the world from a long-term perspective.
Conclusion
The responses to the questions below will help you select one of the two options from the list below. Exchange-traded funds (ETFs) are more flexible and offer larger short-term returns than mutual funds, which demand a longer investment horizon but aid in the development of a long-term financial portfolio. You must make your own decision, but difference between ETF and mutual fund must be one that has been consider carefully.