ETF Vs Mutual fund – Which is the good investment option?
Overview – ETF Vs Mutual fund – Which is the good investment option?
Several investors get confused between ETF and Mutual fund. If we can analyse the features of both the investment options, it would be easy to make the difference among these two. ETF Vs Mutual fund, which is the best investment option?
What is an ETF?
Exchange Traded Fund (ETF) is a basket of stocks which reflects an index, but trades like a share / stock on the stock exchanges. The basket of stocks can be an index stocks, index stocks across countries, a particular commodity like Gold etc.
Types of ETF’s: There are various types of ETF’s like Index ETF, Banking ETF, Commodities ETF (say Gold ETF) etc.
What is a mutual fund?
Mutual fund is a pool of money which invests in various stocks/commodities based on the fund objectives. The funds can be “Open ended” or “close ended”. Open ended mutual funds would continue forever and close ended would close the investments within the pre-defined period say 2 or 3 years.
Types of mutual funds:
- Diversified mutual funds
- Large-cap / Mid-cap/Small-cap funds
- Debt mutual funds
- Sector based mutual funds
- Balanced mutual funds
- Divided mutual funds
ETF Vs Mutual fund: Now the question is, which is the good investment option, ETF Vs mutual fund?
1) Investment methodology
- ETF’s invest in specific Index stocks, specific sectors (e.g. banking stocks), specific countries or specific commodities (e.g. Gold ETF). The performance of the ETF would directly depend on the performance of the underlying asset.
- However, mutual funds invest based on the investment objectives on which the allocation to a specific asset is made.
- ETF’s performance would depend on the specific underlying assets. For an e.g. if SENSEX is rising, Index ETF would be performing well. If SENSEX is falling, ETF’s performance also falls unless you buy the short position.
- Unlike ETF, the Mutual funds performance on the other hand need not depend on the Index or a specific sector performance. It can outperform the Index by choosing good stocks among the index stocks.
3) Professional fund managers
- ETF’s are not managed by any professional fund managers as they do not have any specific mandate about investment allocation.
- Mutual funds are managed by professionals who invest based on the investment objectives of the mutual fund.
4) Winner in the bear market
- During bear markets, the profitable way of doing is going short. ETF investors can take a short position during bear market and make profits.
- Mutual fund investments are done for long term, hence taking short position is not possible.
5) Trading benefits
- ETF’s can be purchased or sold on real time basis on stock exchanges at the stock market price.
- Mutual funds can be purchased or sold at the price declared by the end of the business day. So a mere purchase of mutual funds during the day is not possible.
6) Fund management/ exit load charges:
- For ETF’s, there is no entry or exit load. There are fund management charges of 0.05% to 1.6% of the value of investment.
- For Mutual funds, there is no entry load, the exit load charges would be 1% for debt funds and 1.5% to 2.5% for equity funds.
7) Trading account:
- To buy a ETF, you need to have a demat trading account
- To buy a mutual funds, you need not require any demat account
Conclusion: ETF Vs Mutual fund, both have their advantages and disadvantages. If you have a risk appetite and want to track a particular sector or commodity or index, investment in ETF would be good investment option. In case you have less risk appetite or you look only for long term investment objective, investment in mutual funds would provide good returns.
Readers, what is your opinion on ETF Vs mutual fund? Please give your comments
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