April 1st, 2024 | Updated on June 17th, 2024
An Exchange Traded Fund or ETF is a type of mutual fund and that are tradeable on a stock exchange.
ETF mutual fund schemes are designed to track the performance of a specific index, commodity, bond, or a basket of assets.
It is essential to note that while ETF shares similarities with mutual funds, such as providing diversification, their key differences, like intraday trading and lower expense ratios, make them a distinct investment option.
Investors should carefully consider their investment objectives, risk tolerance, and preferences before investing in an exchange traded fund or any other financial instruments.
ETF and mutual funds, both are investments that pool money from investors to invest in a diversified portfolio of stocks, bonds, or other assets. However, there are some key differences between the two.
Trading On Exchanges
ETFs: Traded on stock exchanges like individual stocks. Investors can buy and sell ETF units throughout the trading day at market prices.
Mutual Funds: Bought and sold through the mutual fund company at the net asset value (NAV) price, which is determined at the close of the market on a daily basis.
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Minimum Investment
ETFs: An exchange traded fund is purchased in multiple of units, which can be bought at the current market price from the stock exchanges.
Mutual Funds: Often require a minimum initial investment, which can vary depending on the type of mutual fund. But generally, it is Rs 1,000 or Rs 500 in case of ELSS mutual fund schemes.
Management Style
ETFs: ETFs are passively managed mutual fund which tracks an index and try replicating its returns.
Mutual Funds: When you invest in mutual funds, generally they are actively managed, excepting index funds.
Index funds are passive funds and very similar to ETFs and can be bought even without having a demat account. Index funds are bought or sold at the NAV declared at the end of the day.
Fees
ETFs: Generally, ETFs have lower expense ratios compared to actively managed mutual funds.
Investors may also incur brokerage or commissions payable to the stockbroker when buying and selling ETF units.
Mutual Funds: When you invest in mutual funds, expense ratios can be higher, especially for actively managed funds. Some mutual funds may also charge exit loads.
Tax
Tax treatment is same for ETF and active mutual funds.
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Flexibility
ETFs: Can be traded throughout the day at market prices, allowing for intra-day buying and selling. They can also be sold short or bought on margin.
Mutual Funds: In case of mutual fund investment, they are traded at the end of the day at the NAV, and there are no intra-day transaction options.
Dividend Reinvestment
ETFs: Dividends are typically paid out, in case of exchange traded funds.
Mutual Funds: Dividends can either by paid (in case the investor has opted for payout option) or it can be reinvested (if the investor has opted for dividend reinvestment option).
In case of dividend reinvestment option, additional units are allotted to the investor.
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Conclusion
Investors should consider their investment goals, time frame, risk profile and convenience when choosing between an exchange traded fund or mutual funds.
Both have their advantages and drawbacks, and the best choice depends on individual circumstances, preferences and knowledge of the investor about mutual funds.
Feature Image Source: Towfiqu barbhuiya
