ETFs vs Mutual Funds - Similarities and Difference Between ETF and Mutual Fund (2024)
Work, earn, spend and repeat. This is a very simplistic outline of the life cycle of most people in the present-day world. But this outline is missing a key ingredient that is crucial for achieving certain life goals- investing. People invest their money in different tools and options with varying objectives in mind. While some may look at investment simply as a means of wealth creation and money management, others view it from the perspective of building a retirement corpus. The reasons may vary but the end game is to make more money using your hard-earned money.
And two much-talked about investment packages that people are increasingly opting for these days are Mutual Funds (MFs) and exchange-traded funds (ETFs).
Simply put, a Mutual Fund involves a pool of money from a group of investors with similar objectives and risk appetites being invested across a range of securities and assets. The investment pool is managed by a fund manager, who makes an assessment of the type of securities to put the money into. The investors can purchase the MF units, which generate returns in line with the performance of the underlying assets. Being professionals with in-depth knowledge of markets and different types of securities, fund houses and managers build a diversified portfolio with the aim of generating maximum returns for investors.
Broadly, MFs can be categorised into three types depending on the type of asset allocation: equity funds, debt funds and hybrid funds. As the name suggests, equity funds are those where a major portion of investment is into shares of various companies. Similarly, debt funds involve money put into a host of debt instruments like government bonds and securities, among others. And then there are hybrid funds, where investments are made across both debt and equity options.
Then there are exchange-traded funds that are similar to MFs in that both of these are investment options where money pooled in from investors is put into a basket of securities. An ETF basically copies an index, which means that it usually consists of stocks of different companies as present in the particular index. It tracks the performance of a particular index and can be traded on the stock exchanges.
Difference between ETF and Mutual Fund
The main difference between ETF and Mutual Fund is that while ETFs can be actively bought and sold on the exchanges, just like any other shares, one can only purchase a unit of a Mutual Fund from a fund house even though these can be listed on the exchanges. In the same way, ETFs generally do not have any minimum lock-in period and can be bought and sold by an investor at their convenience. However, a Mutual Fund unit usually involves some minimum lock-in, and selling the units before this period can also attract a penalty. Also, MFs are actively managed by fund manager or professionals, while ETFs are passive investment options that track the performance of an index.
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* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circ*mstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Investments are subject to changes in laws. Please contact your consultant for an exact calculation of your liabilities.
Both mutual funds and ETFs offer investors pooled investment product options. Mutual funds have more complex structuring than ETFs with varying share classes and fees. ETFs typically appeal to investors because they track market indexes. Mutual funds appeal because they offer a wide selection of actively managed
actively managed
What Is Active Management? The term active management means that an investor, a professional money manager, or a team of professionals is tracking the performance of an investment portfolio and making buy, hold, and sell decisions about the assets in it.
How are ETFs and mutual funds different? How are they managed? While they can be actively or passively managed by fund managers, most ETFs are passive investments pegged to the performance of a particular index. Mutual funds come in both active and indexed varieties, but most are actively managed.
ETFs have several advantages for investors considering this vehicle. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs versus like mutual funds, and potential tax benefits.
ETFs have transparent and hidden fees as well—there are simply fewer of them, and they cost less. Mutual funds charge their shareholders for everything that goes on inside the fund, such as transaction fees, distribution charges, and transfer-agent costs.
The biggest similarity between ETFs (exchange-traded funds) and mutual funds is that they both represent professionally managed collections (or "baskets") of individual stocks or bonds.
Mutual funds and ETFs may hold stocks, bonds, or commodities. Both can track indexes, but ETFs tend to be more cost-effective and liquid since they trade on exchanges like shares of stock. Mutual funds can offer active management and greater regulatory oversight at a higher cost and only allow transactions once daily.
Mutual funds are usually actively managed, although passively-managed index funds have become more popular. ETFs are usually passively managed and track a market index or sector sub-index. ETFs can be bought and sold just like stocks, while mutual funds can only be purchased at the end of each trading day.
FoFs are actively managed funds while ETFs are considered to be passively managed funds. Hence the cost or the expense ratio is higher in the case of FoFs as compared to ETFs.
ETFs and index mutual funds tend to be generally more tax efficient than actively managed funds. And, in general, ETFs tend to be more tax efficient than index mutual funds. You want niche exposure. Specific ETFs focused on particular industries or commodities can give you exposure to market niches.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
In terms of safety, neither the mutual fund nor the ETF is safer than the other due to its structure. Safety is determined by what the fund itself owns. Stocks are usually riskier than bonds, and corporate bonds come with somewhat more risk than U.S. government bonds.
An index fund is a type of mutual fund that tracks a particular market index: the S&P 500, Russell 2000, or MSCI EAFE (hence the name). Because there's no original strategy, not much active management is required and so index funds have a lower cost structure than typical mutual funds.
Key Takeaways. ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees. Still, there are unique risks to some ETFs, including a lack of diversification and tax exposure.
One of the ways that investors make money from exchange traded funds (ETFs) is through dividends that are paid to the ETF issuer and then paid on to their investors in proportion to the number of shares each holds.
The main difference is that index funds are passively managed, while most other mutual funds are actively managed, which changes the way they work and the amount of fees you'll pay.
Mutual funds are regulated investment products offered to the public and available for daily trading.Hedge funds are private investments that are only available to accredited investors. Hedge funds are known for using higher-risk investing strategies with the goal of achieving higher returns for their investors.
FoFs are actively managed funds while ETFs are considered to be passively managed funds. Hence the cost or the expense ratio is higher in the case of FoFs as compared to ETFs.
Mutual funds and stocks both trade on public exchanges and give you access to the shares of your favorite companies. However, mutual funds require less work and offer instant diversification.
Introduction: My name is Geoffrey Lueilwitz, I am a zealous, encouraging, sparkling, enchanting, graceful, faithful, nice person who loves writing and wants to share my knowledge and understanding with you.
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