Mutual funds and ETFs share many common features, as they consist of a mix of many assets; however, both consist of diverse portfolios with investment stocks and other instruments. While ETFs can be traded intraday, you can only purchase mutual funds at the end of the trading day at a calculated price. So, if you are looking for a perfect investment instrument for yourself and cannot decide, this article will explore some features and distinctions between ETF and Mutual funds.
Mutual funds
A mutual fund is a managed and organized financial instrument that invests different investors’ money in securities like stocks, corporate bonds, government bonds, etc. The first and foremost step in mutual funds is building a portfolio using the money pooled from investors of different assets like debt money market instruments, equity, and other funds.
Furthermore, Mutual funds are handled by a team of experts who select all the investments to build a portfolio. Thus, investors must not worry, as the investments are done with complete research. Also, note that a portfolio’s market value depends on asset price movement.
Exchange-Traded Funds (ETFs)
ETFs are a new investment instrument that started in 1993; these instruments are passive and merely copy an index. In other words, ETFs track the performance of an index and are hence not managed by any fund manager. Additionally, it is important to know before investing in EFTs that their price can fluctuate throughout the day.
Unlike mutual funds, ETFs traded in stock exchanges are the same as the share of the companies. And, because they are traded on an exchange, the investor must hold the account for transaction purposes.
Similarities Between Mutual Funds and ETFs
➢ Similarity in Structure
One of the most common similarities between mutual funds and EFTs is that funds from different investors are pooled and then invested in different securities.
➢ Diversification
Apart from the dissimilarities in the portfolio, both ETFs and mutual funds offer diversity in stocks to avoid risk. So, if one stock performs poorly, then there is a possibility that the other one might perform well.
➢ Both have net assets value.
Like Mutual funds, ETFs also have the net value of assets calculated at the end of the trading day, and their performance is determined by the rise and fall in net asset value.
Difference between Mutual Funds and ETFs
Here are some criteria to decide Mutual funds vs. ETF
| Criteria | ETF | Mutual Funds |
| Management | Most of them are passive investment instruments for the performance of a particular index.
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Unlike ETFs, most of the Mutual funds are actively managed by fund managers.
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| Minimum investment | ETFs can be purchased as whole shares, and you can buy them just for the price of one share.
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The minimum investment for mutual funds is usually based on dollar amount rather than determined by the fund’s share price.
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| Management Fees | Management fees of ETFs are very low as they do not require any portfolio management, as they replicate the index’s performance.
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In Mutual funds, most of the decisions are actively taken by fund managers; this is why the fees are relatively higher than in ETFs.
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| Trading | ETFs are traded similarly to stocks and face daily fluctuation.
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Unlike ETFs, Mutual funds are executed once in a trading day. Also, it is the nav that determines the price of funds.
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| Lock-in Period | Investors are free to sell the investment when they want to.
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Most mutual funds do not have a lock-in period, except ELSS has a three-year lock-in period.
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| Tracking of index | ETFs track and try to match the prices of the index and, as an outcome, return with a portfolio similar to the index.
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Mutual funds focus on higher goals, try to beat the index and achieve higher performance.
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How to Make a Choice Between Mutual Funds and ETFs?
- Consider ETFs
- If you are an investor, passive management is suitable for your investment style.
- ETFs can be a better option if you seek a lower expense ratio.
- ETFs are a great choice if you are an investor looking for tax efficiency.
- ETFs are perfect for you if you prefer price movement and plan to share trade actively.
- Consider Mutual Funds
- If active management suits your investment style, you want to outperform the market.
- If you are looking for investment at regular intervals in dollar amounts.
- If your market is inefficient, you may get capitalization benefits from fund managers.
- If you prefer high returns, don’t mind paying higher fees.
Conclusion
Both ETFs and Mutual funds share many similarities, and if you want to create a diversified portfolio, you can consider both of these investment instruments. However, as an investor, gaining knowledge about the functionality is very important before investing. Moreover, for young investors, ETFs, and mutual funds offer tremendous opportunities to seek their financial goals. Thus, if you want to invest, it is important to assess the market risk.
