We put in hours in the office or our business in hopes of making a fortune for ourselves and enjoying all that life has to offer. One way using which investors, be it in India or abroad, seek to multiply their funds is by investing in mutual funds and ETFs.
While mutual funds have been in the industry, for quite some time, the mention of ETFs is rather recent. Without further ado, let us take a deep dive into the nature of mutual funds and ETFs, and understand which product serves your needs better.
Mutual funds
Mutual funds are pooled investment instruments that collect contributions from several small and large investors. The pooled funds are then channelled into equities, public and corporate bonds and money-market instruments. These mutual funds can either be actively managed by a fund manager or can be passively managed, which is another way of saying that they track a particular index. Either way, the goal at the end of the day for any mutual fund house is to improve the investor’s returns. Having said that, investors before pooling their funds into a fund must check the track record of the fund, not just in the last year but in the last three and five years as well. This will provide a performance track record of the fund house, and help him or her make the right choice.
ETFs or Exchange-Traded Funds
ETFs or Exchange-Traded Funds aren’t very dissimilar to mutual funds, but key differences make them ideal for investors who value liquidity and immediacy of transactions.
Just like a mutual fund, an ETF also pools funds from several small and large investors. However, most of the ETFs are passively managed, which means that they track an index and reflect the underlying asset’s price. So, for instance, an ETF investing in the Nifty 50 will invest in the companies that fall under that benchmark.
Difference between mutual funds and ETFs
- Price of trading
Mutual funds are traded at the price of the unit at the end of the day. ETFs, on the other hand, are traded throughout the day and the cost of their units keeps changing on a second-to-second basis.
- Operating expenses
The operating expenses of mutual funds are higher and keep increasing. The operating expenses of ETFs are lower.
- Minimum investment
Mutual funds specify upfront the minimum amount to be invested. ETFs have no such restrictions.
- Tax liability
The tax liability arising from mutual funds is far greater than the tax liability accruing to an investor on the sale of ETFs.
- Transaction costs
Mutual funds have zero or nominal transaction costs. ETFs, on the other hand, levy a transaction cost which is determined from the bid-ask spread.
- Minimum holding period
Mutual fund houses often specify a minimum period for which an investor is required to stay invested before he or she is allowed to start selling their holding. There is no such restriction on the disposal of ETFs.
What works for you?
Mutual funds and ETFs are two different kinds of investment instruments catering to the varying needs and requirements of investors.
Those investing in ETFs are, often, keen on capturing the gains from daily price movements and capitalising on them. While it is true that ETF investors get the latest price, and lower expense ratios, they also have to fork out transaction costs, which is not generally levied on mutual fund investors.
Moreover, mutual funds also allow investors to benefit from active investing, that is when a fund manager manages funds on behalf of the investors. While ETFs also have active investment options, those are very few. However, investors who are keen on passive investing, and do not wish to monitor the changes in their holdings daily can benefit immensely by investing in ETFs. This way, they will be able to dodge the higher tax liabilities stemming from mutual funds and enjoy the extremely low expense ratios.
Platforms like Appreciate Wealth can be invaluable in guiding you to construct a portfolio that matches your financial objectives, ensuring a strategic blend of growth, value, sector-specific, and international exposure. With the right ETFs, you can build a diversified investment strategy that aligns with your goals and risk preferences.
