When you are looking to invest your hard-earned money, your financial advisor is likely to recommend a number of options including exchange-traded funds and mutual funds. Exchange-traded funds and mutual funds contain a lot of similarities which can confuse a potential investor easily. However, some key differences set them apart. Many investors don't have a preference when it comes to picking amongst the two. Both - ETFs and Mutual funds entail a variety of different assets and represent a common avenue for investors to diversify their portfolio. Depending on your financial goals and investment timeframe, you can use both of them together and use them wisely to build an investment portfolio.
Exchange-traded are a type of mutual funds. They help retail investors gain broad exposure in terms of the investment opportunities that are given to them. These are passively managed Index funds listed on stock exchanges that contain all the stocks or shares which carry the same net asset value of the underlying index, and etf mutual funds can be purchased and sold in real-time at a price that varies throughout the day.
Mutual funds, unlike ETFs, cannot be dealt with throughout the day. They are purchased only at the end of a trading day based on the calculated price. They are also actively managed by a professional fund manager who has a team of researchers and this team together helps diversify your investments by investing in different money making instruments. Mutual funds are nothing but a collective pool of investments by different investors who share a common objective.
Similar in nature, Exchange-traded funds and mutual funds have a few key differences -
ETFs are passively managed whereas mutual funds are actively managed by a professional fund manager who comes with market knowledge expertise and helps manage your assets.
Purchasing a mutual fund unit is not under your control. You'll have to place a request with the fund manager to do so, whereas, ETFs can be traded freely in the market and it's up to your will as to when you want to buy or sell your units.
Mutual fund units can only be traded with at the end of each trading day whereas ETFs can be traded throughout the day and the investors can take decisions quickly based on the market.
ETFs don't come with high charges since they don't need to be managed actively whereas mutual funds come with a higher fund management fee.
There is no lock-in period for an exchange-traded fund. Depending on what kind of scheme you choose, the lock-in period for a mutual fund can range anywhere from 9 days to 3 years. For example, an equity-linked savings scheme comes with a lock-in period of 3 years.
Stock orders can be made only through an exchange-traded fund and not a mutual fund.
ETFs provide more tax benefits to its investors as compared to mutual funds owing to the manner of creation and redemption.
Mutual funds cannot be liquidated easily as they come with a lock-in period whereas ETFs have a higher liquidity ratio since they are relevant to the liquidity of the stocks in the index.
Mutual funds track the index but the strategy of picking the assets depends on how they can beat the index and yield a higher performance whereas ETFs try to match the index price and yield a portfolio similar to its index constituents.
If you're interested in building a diversified investment portfolio, both these options can serve you in an excellent manner. However, as mentioned earlier, depending on the time-frame, risk appetite, and financial goals, you can decide which option is better. For some people, liquid investments take precedence over long-term investments. While the nature of both these funds is similar and considering they offer a diversified investment portfolio, a healthy and wise mix of ETFs and mutual funds can prove to be extremely beneficial to your investment record. However, before you make any decisions, understand the functionality behind both these funds, assess the market risks you're willing to take and consult with an expert if you have to ensure you're making the right investment call for yourself. Invest more, invest wisely!