Know the difference between ETF and Mutual Fund
Inflation is a reality of our times and if you want to beat it, investing is the way to go. Investing in market securities like stocks, bonds, and mutual funds enables capital appreciation. Today, Mutual Funds have become a preferred investment choice. However, ETFs, too, are catching up in popularity. Let us compare ETF Vs Mutual Fund to understand them better.
Mutual Funds are investment vehicles where an Asset Management Company (AMC) gathers money from various investors and invests it across different asset classes, i.e., equity securities, debt securities, money market instruments, etc.
Exchange-Traded Funds (ETFs) are similar to Mutual Funds. They invest in securities, and the ETF units get traded on the exchanges like stocks. ETFs tracks indices such as BSE Sensex, Nifty Midcap 100, S&P 500, etc.
The following are the differences between ETFs and Mutual Funds
Like stocks, you can buy and sell any number of ETFs with no minimum investment limit. However, with Mutual Funds, you need to comply with the minimum investment limits for both SIP and lumpsum Mutual Funds investments.
Since ETFs mirror indices like BSE, NSE, etc., they are passively managed and thus incur lower expenses ratios. Mutual Funds are actively managed, leading to higher expense ratios, including entry/exit loads, fund managers fees, account charges, etc.
Only Debt Mutual Funds are highly liquid. On the other hand, all ETFs are liquid in the sense that they can be bought and sold on the same trading day. Also, unlike Mutual Funds, where you buy several units based on the Net Asset Value (NAV), you can buy ETFs at the market price.
Whether it is ETF or Mutual Funds, both attract capital gains tax and dividend tax. However, the cost of ETFs is lesser than that of Mutual Funds, making ETFs relatively tax-friendly.
ETFs are traded like stocks; therefore, they tend to be highly volatile. With Mutual Funds, you can mitigate your risks by investing in debt or hybrid funds. The risks associated with investing in Equity Mutual Funds are at par with ETF investments.
Another point of difference between ETF and Mutual Fund surrounds investment horizons. ETFs are ideal for short-term goals since extreme market fluctuations can work in your favour. Mutual Funds allow capital appreciation over the long term.
Listed on the stock exchanges
Net Asset Value (NAV) applicable at closing time
Traded at the market price during a trading day
Fund Managers actively/passively manage the fund
You can buy or sell ETFs like stocks
Expense ratio, entry & exit load
Bid-ask spread, expense ratios
Whether you choose ETF or Mutual Funds, both will help your money grow. Remember to consider your risk appetite, preferred investment horizon, and financial goals and objectives before investing in either instrument.
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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.