Mutual funds and ETFs have a lot in common – they do. Both are made up of a mix of a lot of different assets and represent a famous way of investing and diversification.
While the two of them are similar in many aspects, they do also have some major differences that you can notice.
The core difference between them is that the ETFs can be traded like intraday stocks, and mutual funds can be bought at the end of each day based on the calculated prices of net asset value.
Mutual funds in the present form have been here for almost 100 years now, and it was launched in 1924. ETFs, on the other hand, are actually newer in the investment area – they were launched in 1993.
Lately, mutual funds were actively managed, which means the managers Made the decisions about how to allocate assets in the fund. ETFs have mostly been passively managed and tracked. That difference has become a blurry line between the two, given the growing rise of ETFs in the market today.
But, before we discuss the distinctions between the two investment vehicles, it’s best we understand them, and it makes things easier. So, first things first, we will look at them individually.
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What are Mutual Funds?
Mutual funds are financial tools that are made by pooling money that is collected from a lot of investors to invest in securities like stocks, bonds, and money market instruments. They are managed by professionals and money managing experts.
These experts allocate the fund’s assets and seek to produce capital gains for the fund’s investors. The portfolio of a mutual fund is constructed and maintained to match the objectives of its investors.
Are you someone who can only invest Rs. 500 a month? Or spend only below Rs. 5000 on an investment, then mutual funds are for you. It gives small investors access to professionally managed and run portfolios of equities, bonds, and various other securities.
Every shareholder participates in a proportion to the gains and losses of the fund. They are a vast number of securities and their performance is usually tracked as the change in the total market cap of the fund is derived from the aggregating performance of the underlying asset.
With mutual funds, money is pooled from the public who invest and is used to buy other securities. The value of the fund company does depend on the performance of the securities that they decide on buying. Just remember, when you buy a share of a mutual fund, you are buying the performance of its portfolio or a part of the portfolio’s value.
When you invest in a share of a mutual fund it is much more different than investing in the shares of stock. This is because mutual funds do not give the holders a voting right, but the stock does. A share of the mutual fund presents investments in various stocks over just one.
What is an ETF?
An ETF in India or any other country, for that fact, is a type of security that tracks an index, commodity, or any other asset, but it can be bought or sold on a stock exchange just like a regular stock. An ETF is structured to track anything from the price of a single commodity to the diver collection of securities. It can even be structured to track specific investment strategies.
There can be many types of investments. These investments are inclusive of commodities, bonds, and various other types. They are marketable security, which means they have an associated price, and it allows them to be easily bought and sold.
It is called an exchange-traded fund because it is traded on an exchange, just like how stocks are. Prices of ETFs will change all through the trading day as shares are bought and sold. It’s not like mutual funds. Mutual funds, as you know, are not traded on the exchange and trade after the market closes. ETFs are more cost-effective and liquid when compared to mutual funds for this reason.
An exchange-traded fund can hold hundreds or even thousands of stocks across industries and sectors. While some focus on particular offerings, others even have a global outlook. To know how they are different from each other. Let’s look at some differences, shall we?
The Different Between an ETF and a Mutual Fund
The biggest difference between the two of them is how they are traded. This is already said to you, but you can get through with it. A mutual fund can only be bought after the market is closed, whether it is actively managed or passively managed. Contradicting that, an exchange-traded fund trades through the day. An investor gets to react to the market news whenever it suits him.
Actively managed funds will cost you more than the ones that are passively managed because you will be paying for investment by picking expertise from the pros. In investment funds, this cost is called the expense ratio and is seen here percentage. So, some part of your share in the assets will be taken as compensation for managing your funds. The average for an actively managed fund is 1 percent, but ETFs don’t come with an expense ratio.
Actively managed funds are expertly driven and managed by professionals – it helps in choosing how to invest your money. But for ETFs you don’t have that kind of expertise – you would have to be doing everything by yourself, including choosing the best fund.
These are some of the major differences between the two, so you wouldn’t get confused on your ground information. Apart from that, this is a piece that lets you know about ETFs and Mutual Funds on separate levels.