Exchange-traded funds or ETFs and mutual funds are two popular investment instruments in India that allow investors to invest in a portfolio of diverse securities. ETFs are passive investment funds that track a specific index or asset. Mutual funds, on the other hand, are actively managed, aiming to achieve market-beating returns. Both investment options provide investors with an opportunity to invest in the stock market at low cost. There are some major differences between these two.
What is an exchange-traded fund (ETF)?
ETFs are passive investment funds that track (copy) the performance of a specific index or asset.
- Trading: These are traded on stock exchanges (like NSE and BSE) just like normal shares.
- Pricing: These can be bought and sold anytime during market hours throughout the trading day. Their prices constantly change depending on market fluctuations.
- Nature: These copy different sector indices and provide exposure to multiple assets.
What is a mutual fund?
According to Groww, mutual funds pool money from many investors to create a diversified portfolio of stocks, bonds and other financial products.
- Management: These funds are managed actively or passively by the fund manager of the Asset Management Company (AMC).
- Pricing: These are bought or sold only once a day, after market close, at the net asset value (NAV) of the fund.
Major differences between ETF and Mutual Fund
- ETFs are traded on a stock exchange like any other stock, making them more liquid. But mutual funds can be bought or sold only at the NAV price at the end of the day.
- Expense ratio is low in ETFs but management fees are high in mutual funds.
- ETFs are passively managed, which means the fund tracks a specific index, making them less risky and transparent, but mutual funds are actively managed, which means the fund manager invests in securities based on his analysis and market outlook.
- ETFs allow investors to start with smaller amounts, but mutual funds typically have higher minimum investment requirements.
- ETFs are more tax-efficient because they have lower capital gains taxes, but mutual funds are less tax-efficient.
- ETFs offer more targeted investments that track a specific index, but mutual funds offer more diversification options and exposure to a wider range of securities.
Latest Business News