What is the Difference Between ETF and Mutual Fund?
Exchange-traded funds (ETFs) and mutual funds are two popular investment vehicles in India that allow investors to gain exposure to a diversified portfolio of securities.
ETFs are passive investment funds that track an underlying index or asset, while mutual funds are actively managed investments that aim to outperform the market.
Both ETFs and mutual funds offer investors a low-cost way to invest in the stock market, as they provide diversification and professional management. However, ETFs trade on an exchange like stocks, while mutual funds are bought and sold through a fund house at the end of the trading day at the Net Asset Value (NAV).
Investors should consider their investment goals and risk tolerance when deciding between ETFs and mutual funds.
Key Difference Between ETF and Mutual Fund
Following are the differences between ETF and mutual funds. Through the differences, see ETF vs mutual fund which is better option for you-
|
Differences |
ETF |
Mutual Fund |
|
Trading And Liquidity |
ETFs are traded on the stock exchange like any other stock, making them more liquid. |
Mutual funds can only be bought or sold at the end of the day at the NAV price. |
|
Cost Structure |
ETFs have lower expense ratios. |
Mutual funds have higher management fees. |
|
Investment Approach |
ETFs are passively managed, which means the fund mirrors a particular index, making them less risky and transparent. |
Mutual funds are actively managed, which means fund managers invest in securities based on their analysis and market outlook. |
|
Minimum Investment |
ETFs allow investors to start with smaller amounts. |
Mutual funds typically require a higher minimum investment. |
|
Taxation |
ETFs are more tax-efficient as they have a lower capital gains tax. |
Mutual Funds are less tax-efficient. |
|
Diversification |
ETFs offer more targeted investments that mirror a particular index. |
Mutual funds offer more diversification options and exposure to a broader range of securities. |
ETF vs Mutual Fund
In India, both Exchange-Traded Funds (ETFs) and Mutual Funds are popular investment options for retail investors. However, while both investment options have similarities, there are some critical differences between the two.
- One significant difference between ETFs and Mutual Funds is how they are traded. ETFs trade on an exchange, and their prices fluctuate throughout the day, like stocks.
On the other hand, Mutual Funds are traded only once per day after the market closes, at the fund's Net Asset Value (NAV). - Another significant difference between ETFs and Mutual Funds is their costs. Mutual Funds typically have higher expense ratios than ETFs, which can eat into returns over time.
On the other hand, ETFs usually have lower expenses and may not have the sales loads or redemption fees that Mutual Funds often charge. - In terms of diversification, ETFs and Mutual Funds offer different options. ETFs tend to track an index, such as the Nifty 50 or the BSE Sensex, and offer exposure to a wide range of companies across various sectors.
On the other hand, Mutual Funds offer the ability to invest in various asset classes, including equity, debt, and hybrid options. - Another difference between ETFs and Mutual Funds is the taxation of gains. Gains on Mutual Funds held for less than one year are taxed at a higher rate than ETFs, while gains on Mutual Funds held for more than one year are tax-free.
Conversely, ETFs held for more than one year are taxed at a lower rate than Mutual Funds. - Overall, both ETFs and Mutual Funds offer a range of benefits to Indian investors, and the choice between the two depends on individual preferences and investment goals.
While ETFs are generally lower cost and provide diversification, Mutual Funds offer a range of asset classes and the potential for tax-free gains over the long term.
Conclusion
An ETF is traded throughout the day at a price decided in real-time by the investors' demand whereas Mutual funds are traded only at the end of the day at the Net Asset Value of the Fund.
Most ETFs have considerably lower expense ratios due to the passive nature of portfolio strategies, but ETFs may have trading fees. In addition, ETFs have fewer capital gains since the redemption doesn’t involve selling any stock in the portfolio.
Overall, both ETFs and mutual funds have their pros and cons. Investors should consider their investment goals, risk tolerance, and horizon before deciding which is the better investment option.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.