What is the difference between ETF and mutual funds?

An Exchange Traded Fund (ETF) is a marketable security that track indexes like NASDAQ-100. S&P500, etc.

A mutual fund is an investment vehicle that collects money from investors and invests on their behalf.

The main differences between ETF and mutual funds are:

• Trade- ETFs trade during the trading day while mutual funds trade at the closing NAV.
• Operating Expenses- ETFs have low operating expenses, while those of mutual funds vary.
• Minimum Investment Requirement- ETFs do not have any minimum investment requirement, while most mutual funds do.
• Tax Efficiency- ETFs are more tax efficient than mutual funds.
• Sales Load- ETFs do not have sales load, while mutual funds might have sales load.
• Liquidity- ETFs have higher liquidity as compared to mutual funds.

Exchange-traded fund(ETF) is kind of an index fund that invest in an index, a commodity, currencies, bonds etc. A mutual fund is an investment instrument, basically collection of stocks and/or bonds, managed by professionals of an asset management company.

Let’s see how both are different.

Differences:

• ETFs are listed and traded on a stock exchange like common stocks where as mutual funds themselves are not listed rather have listed stocks/bonds in their portfolio.
• ETF includes almost every investing asset class including commodities or currencies, whereas mutual fund has stocks and bonds in their investment basket.
• ETF can be bought and sold at any time of the day, in contrast, mutual funds settle after market close.
• Transaction of ETF done at prevailing market price anytime, but mutual fund can only be purchases from fund house at the NAV price, fixed at the end of trading day.
• Liquidity of ETF have higher as compared to mutual funds.
• Operating expenses for ETF is lower than a mutual fund.
• Investors can place different types of order for buying ETFs like stop-loss order, buy on margin etc, as they are traded like stocks. This facility is not available with mutual funds.
• ETF provide more tax benefits as compared to mutual funds.

So, after going through differences between both the investment scheme, you will be able to make better investment decisions. ETFs are only 25 years old investment instruments, growing in popularity exponentially. 

Happy Investing!