Exchange-traded funds (ETFs) and mutual funds are well-known ways for investors to diversify their portfolios. But these two have some significant differences. For instance, mutual funds have been around for almost a century now since the first was launched in 1924. ETFs are still a new idea in the investment world since the first one debuted in 1993. Also, mutual funds can be bought at every trading day’s end at a specific price called the net asset value. Whereas ETFs can be invested intra-day, similar to stocks.
Both ETF vs Mutual fund have further differences. Find all of them from the following section and determine which one you want to invest in first.
ETF vs mutual fund: Significant Differences
The following are the most distinguishing factors between mutual funds and ETFs.
Management
Fund managers can manage ETFs both passively and actively. However, most of the funds are passive investments that rely on a specific index’s performance. On the contrary, mutual funds come in both indexed and passive varieties. But, most of them are managed actively by fund managers.
Minimum Investment
ETFs do not need a minimum initial investment since they are traded like stocks and are purchased as complete shares. An ETF can be bought at the price of a single share, which is referred to as the market price of the fund. In comparison, mutual funds need a higher minimum investment.
Diversification
ETFs have target investments that mirror specific indexes. On the other hand, mutual funds may provide more diversification and expose investors to different kinds of securities.
Costs
ETFs have a few costs, such as the traditional commission and operating expense ratio. However, the amount is much lower than that of most other investments. At the same time, the mutual funds have higher management fees.
Taxation
ETFs generally generate lower capital gains and are more tax-efficient. However, mutual funds are less so because they can have considerable gains.
ETF vs mutual fund: Different Types
Both ETFs and mutual funds have their unique types, some of which include the following:
Types of ETFs
Here are the different types of exchange-traded funds:
- Bond ETFs: These funds are about investing in fixed-income securities such as corporate bonds, government bonds, or municipal bonds. These offer investors diversification and generate income.
- Equity ETFs: Equity funds are invested mostly in stocks of different companies. They expose investors to specific regions, sectors, or market indices.
- Commodity ETFs: These invest in physical commodities like silver, gold, agricultural products, or oil. It exposes people to commodity prices without needing direct ownership.
- Sector ETFs: The sector funds focus on different industries of the economy, such as healthcare, technology, or energy. It allows investors to target sectors that they think will perform better than the broader market.
- International ETFs: These international funds invest in bonds or stocks of companies located outside the home country. These investments provide potential growth opportunities and diversification in global markets.
Types of Mutual Funds
Here are the different kinds of mutual funds that one can invest in.
- Equity Funds: These funds aim for capital appreciation over the long run by investing in stocks. They can be classified based on investment style or market capitalization.
- Hybrid Funds: These funds are also called balanced funds that allocate investments across both bonds and stocks. The name is so because they offer a balanced approach to return and risk.
- Debt Funds: These debt funds invest in fixed-income securities such as corporate bonds, government bonds or money market instruments. It provides investors with capital preservation and regular income.
- Tax-Saving Funds: The tax-saving funds are under the Equity Linked Savings Schemes (ELSS) and offer tax benefits under the Income Tax Act, Section 80C. These can bring long-run capital appreciation through equity investments.
- Index Funds: These funds follow the specific market index’s performance by investing in securities that have the same proportion.
Conclusion
When ETF vs Mutual funds are compared, both have their differences. But they also have similarities. For instance, both of these kinds of investments have a diversified structure. They help investors expand their portfolios and explore new investment options. They can also be managed professionally by fund managers who can make decisions on the investors’ behalf. Both the ETFs and the mutual funds provide several choices according to one’s risk tolerance and investment objectives.
Ultimately, while both have their similarities and differences, they must be considered carefully. They have their pros and cons that may not be suitable for every investor. As such, the comparison above will help in determining whether you should invest in mutual funds or ETFs. Your returns will depend on the option you choose.
