Mutual funds and ETFs (Exchange-Traded Funds) are two well-known investment options that offer you the opportunity to grow your wealth. ETFs are a specific type of mutual fund with some unique features. This is why some investors view them as entirely separate options.
In this blog, let's understand the differences between the two so that you can understand which investment suits you better:
What are exchange-traded funds?
Exchange Traded Funds are passive funds that replicate the performance of an underlying index or asset. These trade on the stock exchanges throughout the day, similar to individual stocks.
Exchange Traded Funds can include equities, debt instruments, gold, or other asset classes. ETFs share structural similarities with mutual funds but they have the flexibility of being traded like stocks on stock exchanges.
ETFs follow the principle of passive investing and aim to replicate the performance of a specific index rather than outperform it. This sets them apart from actively managed funds, where fund managers aim to beat the benchmark index.
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What are Mutual Funds?
A mutual fund scheme pools money from multiple investors to create a diversified portfolio of stocks, debt securities, or a mix of both. These funds are managed by a team of research analysts and the fund manager who determine the sectors to target and select specific securities like stocks or debt instruments—within those sectors to maximise returns.
The fund managers aim to outperform the market. They can be purchased or redeemed directly through fund houses.
When you invest in a mutual fund, you are buying a small portion of this entire portfolio. The performance of your investment is reflected in the NAV of the fund, which is calculated at the end of each trading day. The NAV fluctuates based on the price movements of the underlying assets within the portfolio.
Difference Between ETFs and Mutual Funds
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Basis
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ETFs (Exchange Traded Funds)
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Mutual Funds
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Trading Flexibility
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ETFs are traded on stock exchanges just like stocks and can be bought or sold anytime during market hours.
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Mutual fund units are generally purchased directly from the fund house or brokerage houses
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Price Determination
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ETF units are priced in real-time based on supply and demand in the market.
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Mutual fund units are bought and sold at the NAV, which is calculated at the end of the trading day.
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Lock-In Period
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ETFs do not have a lock-in period, offering the flexibility to buy and sell as needed.
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Most mutual funds don’t have a lock-in period, but early redemptions might incur an exit load, as per the scheme’s terms.
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Management Style
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ETFs are managed passively and track a benchmark.
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Mutual funds can be actively or passively managed, depending on the scheme. Index funds and funds of funds (FoFs) are examples of passively managed mutual funds.
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Expense Ratio
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ETFs generally have low expense ratios, often around 0.35%, making them cost-efficient.
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Actively managed mutual funds have higher expense ratios, of up to 2%, which can reduce returns.
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Market Accessibility
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ETF transactions require a Demat account and are subject to market fluctuations during the trading day.
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Mutual funds are not traded on exchanges and are accessed through fund houses, with pricing based on NAV.
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Best Performing ETFs and Mutual Funds in India
Now that you have a clear understanding of mutual funds as well as ETFs, let’s look at the top mutual funds and ETFs in India.
Best ETFs in India
Best Mutual Funds in India
Conclusion
ETFs are traded on stock exchanges throughout the day, with prices fluctuating in real time based on investor demand. Whereas, mutual funds are priced only once daily, based on their Net Asset Value (NAV) at the close of trading.
Due to their passive investment approach, ETFs have lower expense ratios compared to mutual funds. Investors incur trading fees when buying or selling ETF units. Whereas, ETFs generate lower capital gains since their structure avoids selling stocks during redemptions.
Both ETFs and mutual funds come with their advantages and limits. To choose the right option, you should evaluate your financial goals, risk appetite, and investment timeline.
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