Introduction
One of the most popular investment products, mutual funds and exchange-traded funds/ETFs, both provide means through which investors can seek diversification. Their popularity has witnessed some tremendous growth over the past few years.
The mutual fund industry’s total AUM moved up impressively by 43.30%, from ₹47.80 trillion in October 2023 to ₹68.50 trillion by October 2024, implying a surging confidence among Indian investors in these instruments.
ETFs comprised 12.6% of the total AUM in October 2024, marking an increasing share in the overall investment context.
Although both mutual funds and ETFs pool money from different investors for building a portfolio of assets, there is a stark difference between them in terms of composition, trading dynamics, and management philosophies.
An understanding of ETF vs Mutual Fund which is better lets investors make an intelligent decision according to financial expectations and the tolerance for risk.
Understanding Mutual Funds
Mutual funds allow people to invest in a varied group of securities easily. By combining money from many investors, mutual funds provide access to professional management skills. Fund managers, who are skilled at examining market trends and choosing investments, aim to meet the fund’s stated goals.
This grouped investment method, together with professional management, makes mutual funds an appealing choice for all investor levels. Investors can start with small amounts and select from a wide variety of funds, customised to their risk appetite and financial objectives.
It is important to understand that mutual fund transactions are valued based on the net asset value (NAV) calculated at the end of the day. So, investors may not know the exact price at purchase or sale until the market closes.
Understanding ETFs
ETFs are hybrid investments that have the elements of stocks as well as mutual funds.
Both mutual funds and ETFs collect money from multiple investors to build a diversified portfolio of assets. The primary distinction, however, is in their trading process. Unlike mutual funds, which are bought or sold at the end-of-day net asset value (NAV), ETFs are traded on stock exchanges throughout the day, just like shares of a company.
This means you can put in an order to buy or sell them anytime during the market at the market price.
ETFs are designed to mimic certain indices, like Nifty 50 or Sensex. Since this type of investing does not require a lot of active portfolio management, costs are usually low.
Difference Between ETF vs Mutual Fund
When stepping into the world of investing, one of the most common dilemmas faced by investors is choosing between ETF vs Mutual Fund.
While both are designed to pool money from investors and diversify risks, their structure, functionality, and overall appeal differ significantly.
Here is a quick difference between ETF vs Mutual fund in India:
| Aspect | Mutual Funds | ETFs (Exchange-Traded Funds) |
| Structure | Open/closed ended funds | Traded on stock exchanges like individual stocks. |
| Trading | Transactions occur directly with the fund house at end-of-day NAV. | Can be bought/sold throughout the day at market-determined prices. |
| Management Style | Actively/Passively managed by professional fund managers aiming to outperform benchmarks. | Primarily passively managed, tracking an index or sector performance. |
| Costs & Fees | Higher expense ratios due to management and administrative costs.May have exit loads for early withdrawals. | Lower expense ratios due to passive management. Brokerage fees may apply. Involves transaction costs. |
| Liquidity & Flexibility | Less liquid; transactions are processed at end-of-day NAV. | Highly liquid; can be traded throughout the trading day. |
| Performance & Transparency | Performance depends on the fund manager’s expertise and may outperform benchmarks. Holdings are disclosed periodically. | Closely tracks the performance of the underlying index or sector. Holdings are disclosed daily for maximum transparency. |
| Investor Suitability | Ideal for beginners and long-term investors seeking professional management. | Suitable for cost-conscious investors comfortable with trading. |
ETFs vs. Mutual Funds: Which is Better?
The selection between exchange-traded funds and mutual funds mainly hinges on your investment objectives, investment timeframe, and desired level of involvement:
- ETFs are best for self-guided investors who are at ease making independent choices and want affordable, highly liquid investment vehicles. They are especially beneficial for those seeking real-time access to their investments or prioritising tracking market indexes.
- In contrast, mutual funds accommodate those preferring a more hands-off approach valuing professional fund managers’ expertise. They also suit investors wanting a diversified portfolio but are less worried about intraday trading or small cost variances.
Final Thoughts
The ETF vs mutual fund debate has no winner; the most appropriate option depends on an investor’s specific aims and needs.
ETFs provide liquidity, low expenses, and transparency that suit investors wanting flexibility and control. Mutual funds provide professional management and the possibility for higher returns over an extended period. This makes them attractive to those wanting expertise and long-term portfolio increases.
Rather than deciding between ETFs or mutual funds, think about how using both can balance an investment portfolio. Balancing the strengths of the two can promote a varied, flexible investing plan personalised to meet financial goals.
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