Mutual Funds vs Exchange-Traded Funds (ETFs)

In major financial markets around the world including the U.S, Wealth Management is defined by a host of market linked investment options such as Mutual Funds and Exchange-Traded Funds. Both these investment options have their own set of advantages and functionality with a common motive. The primary function is to pool a set of investors, invest monies collected into stocks, bonds and other available instruments in the financial market.

Let's go ahead and explore two of the most viable investment options and discuss the fundamentals to help you make wise and well informed investment decisions.

What is Mutual Fund?

Managed by an AMC (Asset Management Company), a Mutual fund is a private pool where like minded retail investors come together and contribute into a fund with a certain pre-defined goals. There are thousands of MFs with diversification based on multiple factors such as sectoral allocation and the risk factor.

Monies collected under a specific fund is reinvested by a Fund Manager into available instruments in the financial market such as shares, debentures and bonds on the basis of the goal set by the fund. For example, a fund with a vision to invest in blue chip companies will pick out companies with high potential and invest money to buy shares.

For the investor, a fixed numbers of units are assigned every time they invest and the value of the units held is determined by the NAV (Net Asset Value). As and when these units become available for redemption, the investor can decide to buy/sell units. When the dividends are disbursed, they are distributed as per the units held by the investor.

Exchange-Traded Funds

In this type of investment option, the process is reversed to that of a Mutual Fund. Here, registered institutions create a pool of stocks represented by an index. After creation of the index, the shares are deposited with the holders which are then redistributed as units among investors and traded on stock exchanges.

Slightly complicated, they work with goals similar to that of a Mutual Fund, to indirectly invest in the financial market and distribute the earnings as per the units held.

Difference Between Mutual Funds & ETFs

  • While ETFs can be traded (bought and sold) through a brokerage/demat account, Mutual Funds can be transacted by means of an account held with the fund house. Since you’re not directly investing in the stock markets, MFs can be bought and sold through the intermediary.
  • The investor can directly trade ETFs on the listed stock exchange during the designated trading hours where the pricing is determined real time. With Mutual Funds, the value is determined after the close of trading hours for indexing and determination of the unit value.
  • The transaction costs for trading ETFs is determined on the basis of the index and is generally limited. On the other side, MFs have the “Load” factor, where a small percentage of the investment amount is deducted either upfront or otherwise by the fund house.

There are many such differences between these two products depending on the fund in question. In India, the concept of investing in MFs is witnessing a surge like never before, owing to booming markets and diversification in the product portfolio. If you’re a first time investor and looking forward to investing in a Mutual Fund, starting with a SIP (Systematic Investment Plan) can be the ideal deal. Here, you invest a fixed amount of money every month into the fund. On the basis of the value, a certain number of units are assigned to your folio.

Read more about Mutual Funds under the “Investments” section of this website. 

GST rate of 18% applicable for all financial services effective July 1, 2017.

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