Mutual funds and ETFs are created using the concept of pooled fund investing. Although they are similar there are a few differences between the two funds. Keep reading to know more.
What is ETF
ETF stands for Exchange-Traded-Fund. This investment fund is similar to stocks and is traded on stock exchanges. ETFs were started in 2001 in India and hold assets such as commodities, bonds and stocks close to their net asset value. ETF traces the index like Nifty or Sensex and is a diversified portfolio that tracks the yield and returns of the respective index.
They are attractive investments because they cost less, are tax-efficient and have stock-like features. Additionally, it has the benefit of buying and selling a particular security.
ETF is a highly liquid fund and provides good returns at a low cost. However, it experiences price fluctuations because they are traded throughout the day.
What is Mutual Funds?
On the other hand, a mutual fund is a type of investment fund that pools in money from several investors to be invested in financial assets. Mutual funds are controlled by an expert known as a fund manager. The fund manager is responsible to invest the funds into diversified investments such as debentures, bonds, shares, and other financial instruments.
The shares held by each investor represent their portion in the fund. The investor can suffer a loss or a profit when the securities are sold.
Mutual funds do not require a huge investment and an investor can invest a small amount and get the benefit of the portfolio investment.
Differences between ETF and mutual fund
Mutual Fund is an investment fund in which many investors pool their money together to invest in diversified securities.
While ETF is an index fund that tracks the index and is listed and traded in the financial market. In Mutual Fund, the holdings are disclosed every quarter while in ETF disclosure of holdings are done daily.
A mutual fund has a higher average expense ratio than the ETF.
The buying and selling of shares proceed from the fund house in a mutual fund. In ETF, trading is done between two investors in the secondary market.
Due to frequent trading, ETF capital gains are higher and therefore, are considered more tax-efficient than mutual funds.
The funds are traded on the Net Asset Value(NAV) in a mutual fund while in ETF, the funds are traded on the quoted price.
You do not need a share trading account to buy a mutual fund unlike in ETF which requires an account to process the transaction.
The mutual fund involves a brokerage while ETF does not.
Mutual funds are actively managed by fund managers while ETF funds are passively managed as they match a specific index.
While mutual funds can be issued in a fraction, ETF cannot be sold in a fraction.
Similarities between ETF and Mutual Fund
ETFs and mutual funds have 100 to 3000 different individual securities within the fund. Both the investment products are built from the pooled concept and regulated by the same securities laws.
Apart from the above-mentioned differences, remember that both the investments are portfolios. Both allow you to invest in diverse financial instruments such as bonds, stocks, and other assets through a single fund.