Table of contents
Introduction
If you are an investor looking to build up your portfolio, two great options for you to consider are mutual funds and exchange-traded funds (ETFs). The very first mutual fund was launched in 1924. As compared to it, ETFs are quite new as the first one was launched in 1993. Usually, professional fund managers manage mutual funds, while ETFs are not actively managed.
In the following article, we will understand what is the difference between ETF and mutual fund.
What are mutual funds?
It is really important to thoroughly understand ETF and mutual fund differences if you want to know which one suits you the best. In mutual funds, money is pooled from investors and is invested in a diversified portfolio that includes equity, debt, and more.
Mutual funds have a dedicated fund manager who does market research, technical analysis, etc. to invest in the best securities depending on the fund’s goal.
You get units depending on a fund’s NAV or net asset value when you make a mutual fund investment. In January 2024, almost Rs. 52,89,008 crores worth of assets were under the management of mutual funds.
What are ETFs?
Exchange traded funds are investment funds where you can invest in multiple securities at once. They are like mutual funds but trade on exchanges just like normal stocks.
ETFs try to replicate the performance of an index with no more investments allowed after the initial round.
Over time, ETFs have become popular among investors. For example, in the last 20 years, India’s first ETF Nifty BeES has grown from Rs 2 crore in 2002 to Rs 10,000 crore in October 2022.
Mutual fund vs ETF: Key differences
The following table mentions the differences between exchange traded funds vs mutual funds for comparison –
| Category | Mutual Funds | ETFs |
| Liquidity | You can buy or sell mutual funds at their NAV price | ETFs are more liquid as you can trade in them just like a normal stock of a company. |
| Cost | There is a high expense ratio for mutual funds. | Usually, there is a lower expense ratio for ETFs |
| Approach to Investment | Fund managers actively manage them and purchase securities depending on market research and analysis | ETFs are managed passively and they usually replicate the performance of an index |
| Portfolio Diversification | You get access to many securities and can diversify your portfolio more. | ETFs offer targeted investment and replicate a single index |
| Taxation | There are not many tax benefits with mutual funds | ETFs have low capital gains tax and are tax-efficient |
Mutual Funds vs ETF – Which is the Better Option?
Now that you know the ETF and mutual fund difference, you can decide which is the better option for you. The choice between mutual fund vs ETF varies based on your goals and risk tolerance level. For short-term investment and higher liquidity requirements, ETFs are suitable while for long-term, mutual funds work better.
Consider your financial goals and investment strategy to pick your option out of exchange-traded funds vs mutual funds.
Conclusion
Both mutual funds, as well as exchange-traded funds, are great options for investors to expand their portfolios and create wealth. There is no clear winner between the ETF vs mutual fund as the choice depends on your goals and risk appetite. To know more about the stock market and other investment-related topics, visit StockGro!
Frequently Asked Questions (FAQs)
In mutual funds, money is pooled and invested in a diversified portfolio of assets such as equity, debt, etc. A dedicated fund manager conducts market research, technical analysis, etc. to invest funds and generate returns.
ETFs try to replicate the performance of an index and are passively managed with lower associated costs.
There is no clear-cut answer as both these investment options have their own benefits. For long-term investors, mutual funds are good, while those who want to invest for the short term can opt for ETFs.
ETFs are more liquid as you can trade in them just like a normal stock of a company. Mutual funds can be bought or sold only at their NAV.
There are mainly three different types of exchange-traded funds or ETFs that you can consider for your portfolio – Equity ETFs, Bond ETFs, and commodity ETFs.