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Mutual Fund vs ETF

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Mutual Fund vs ETF

When it’s come on investment, you will get confuse with lots of different investment options like RDs, FDs, PPF, Mutual Funds, Equity Investment, ETFs and many more. There is no straight line between your investment option, Mutual Fund and ETFs are kind of similar investment with very thin line of difference.

ETF and Mutual funds both are similitude where they pool together money of investors and invest in different segment.

Logically there is not much of a difference between ETF and Mutual Funds, one key difference is ETFs are liquid money as they are traded on exchange and can buy and sold like share any time in market hrs where MF are managed by fund management company buying and selling need a separate request depend on fund you have invested money.

What is Mutual Fund?

    In simpler words, Mutual Fund investment can be described as a fund that is managed professionally by AMC, which takes in and pours money from different investor into an investment pool, thus a number of shares contribute together for buying one single stock as a whole, and none of the investor hold the right to own the stock as a whole to themselves. In simple words, they are just baskets of equities, commodities and money market instruments.

What is an ETF?

    ETF or Exchange traded Fund is something, that closely resembles Mutual fund in almost all respect except a few detailed aspects.  Basically ETF is traded as a stock, very much unlike the MFs that are shared as shares. The former is most commonly composed of Index Funds, all of which are traded and listed on exchanges like Stocks. In other words, ETF represents a basket full of Index fund compositons, like Nifty 50 and so on. ETF is getting much popularity due to the fact that, ETF proves to be useful guide for those investors who tends to have difficulty in learning the minor trading tricks and portfolio management process. Equity, Debt, Gold as well as international Indices, all are the composition of an ETF basket.


Having close resemblance among the Mutual Fund investment, and investment in ETF, a cunning investor is sure to figure out the notable differences. These differences are pretty important since, one can cunningly employ the differences of one investment type against other for his investment, to maximize the profit boosts. Coming to the fact of Mutual fund Vs. ETF, there can be made, a comparative discussion, point-by-point, which will clarify doubts regarding either of them and would help in choosing the best among the two.


      Among the two, ETF tends to have more trading flexibility than Mutual Fund, since one can buy and sell ETF, as regular share in trading hrs, which facility is not available in case of  Mutual Funds. MF can only be sold or bought at the end of a business day. Moreover, this dynamic value of ETF is determined by the  equity/index/instrument like nature of it, while MF is treated under the NAV. Thus basically ETFs are traded on the basis of quoted price only.


      Diversely speaking, ETFs and MF both are ruling the market with their ever-increasing demand. With the increasing debate between these two, the economical background has paved the way for another point of differentiation between these two. There can be different types of ETFs in the emerging Indian Share markets, where ETFs are slowly making their stronghold. But primarily, ETFs are of three types, give as such:

      • INDEX ETF: The ETF that tracks the underlying assets in perspective of Index’s performance, is the Index ETFs. They are generally classified further into “Replication” and “Representative” types.
      • COMMODITY ETF OR ETC: This type of ETFs makes investment generally on commodity equipments like Gold, Silver and many other precious metals.
      • BOND ETF: As the name suggests, this type of ETFs makes an investment mostly on bonds and has elevated demand, when share market is in an economic recession. Bonds ETF can give good returns (Unless brought and sold by a third party).

      Apart from this, new incorporations like, Leveraged ETF, Currency ETF, Actively managed ETF and many others are stealing attention of investors. On the other hand Mutual Fund can be generally of numerous types. But the most common type of MF are as follows:


      And lots more. In fact there can hundreds of Mutual Funds, but the number is comparatively higher in compared to the type of ETFs.


      As described before, ETFs are liable to disclose the holdings on daily basis, due to its dynamic nature, while the MF’s disclosure is made every quarter. Thus transparency is literally more in case of ETFs.


      More the Tax effectiveness means, less tax-liable events over a stock or share, which occurs generally in ETF. ETF doesn’t hamper any market capital gains while selling the stocks, nor does they interfere any underlying assets. But in case of Mutual Fund investments, the taxation is a frequent event. At least more frequent than that of ETF’s. In practise, ETF is more frequently traded in-kind than in Cash, that results in less distribution of the capital gains to the investors. Another factor that pushes the tax efficiency away from Mutual Funds is the Phantom Gains; which is generally referred to the phenomenon of investors sudden buying of MF shares prior to the selling of a large holding by the Fund manager. But this is not frequent with ETF shares since, they are traded “in-kind” rather than “in-cash”, and so funds are generally created by “in-kind” exchange for securities.


      While comparing ETF and Mutual Funds, one of the notable difference that can be observed, is the Fees and expense ratios. Early in 2016, according to Investment Company Institute, actively managed Mutual Fund accompanied a 0.82% average expense ratio, and Index equity mutual funds accompanied around 0.27% expense ratios, which were quite higher as compared to expense ratio of index ETF itself. It lingered around 0.27%. ETFs which track the broader indices like Sensex and Nifty charge 0.05%-0.10% annual total expense ratio (TER) whereas the TER of actively managed funds can go up to as high as 3%.


      As compared to Mutual Funds, ETFs requires much less money to start with. There are many Mutual funds, which charges exceptionally high amount to start with investments in Mutual Funds. But that’s not with the case of ETF, since you can buy even a single share, it saves your money from getting invested in vague that you, otherwise haven’t invested. ETFs are traded on exchange and you can buy 1 unit or in multiples, no limit.


      The commission in trading is much familiar among the stockholders and investors. ETFs, as expressed earlier, are generally traded as a stock, and so buying and selling of ETFs imply brokerage commission. Well in this case, Mutual Funds don't have direct brokerage commission involved, but it covers under your expense ratio.


      In case of ETF there are no holding limit, can be enter and exit any time. But in case of Mutual Funds, there are some exit criteria and need to pay penalty if exit early. So in case of mutual funds you have some locking period.


      Do you have the market-strategy? Can you allocate funds wisely in the market to bring back the highest profit to yourself? Then why shouldn’t you go for actively managed ETF? Alas! Most of the ETFs are index funds and so, can only be tracked on market index prices and thus most ETFs had to abide by the market (Though there are some actively managed ETFs which again has high charge). In this contrary, most Mutual Funds are actively managed funds, and thus opting for MFs would be a plus point if fund manager is extremely talented to take calls actively.


      If you think that you are more suitable with auto-investments and withdrawal option is your foremost preference, then Mutual Funds would be the right choice for you. The Mutual Funds sets up these automatic procedures, based on your pre-determined preferences. In this regards, ETF doesn’t allow this auto-manipulation system. This auto and pre-determined, systematic investment plan in Mutual Fund is called SIP or Systematic Investment Plan and the systematic procedure to have timely withdrawals, is called SWP or Systematic Withdrawal Plan.


Despite of having numerous dissimilarities between the Mutual funds and ETFs, there are some significant areas, where they show similarities. These are as described below:


    From the perspective of risks, investments in both Mutual funds and ETF possess less threat than that arises due to investments on individual stocks and bonds. Diversification in both of them, is the main cause for this.


    The investor who opts for either of the ETF or Mutual Funds, are exposed to diverse variety of international and US stock and Bonds. Thus the investor is availed with choices among many.


    Both ETF and MF is controlled by a professional portfolio manager, who knows their duty well and allocates your investments as per the suitable market condition.


    Apart from the fact which is better and which is not, it can be said financially that both Mutual funds as well as ETF are two investment options, which would let you join specific investment programmes by buying different money market instruments like stocks, bonds, commodities, assets etc through a single investment fund only.

    The choice between a mutual fund and an ETF is based on the convenience of the buyer. For ETF investment, you need a brokerage (Trading and Demat) Account, if you already have Trading & Demat account you can start investing in ETF. If you don’t want to go on brokerage account path, mutual funds are the best investment option for you.

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Last updated on 29th Aug 2018

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