Mutual Funds Vs Exchange-Traded Funds: Which is Better Investment
People in India are usually not aware much about their investment options. They often end up choosing wrong financial path and regret. One such huge confusion is between ETFs and mutual funds. Both of them have a lot in common. However, there are a few crucial differences that may make one a better fit for you than the other. We'll go through all the differences in this post, as well as how to decide which of the two instruments is ideal for you.
Mutual Fund: Introduction
A Mutual Fund is a firm that collects money from several investors and invests it in securities such as stocks, bonds, and short-term loans. The mutual fund's portfolio is made up of all of its holdings & these are purchased by investors. Each share reflects an investor's stake in the fund and the revenue generated by it.
Top Mutual Funds Globally
- T. Rowe Price Blue Chip Growth Fund (TROW) (TBCIX).
- Fidelity 500 Index Fund (FXAIX),
- Vanguard Dividend Growth Fund (VDIGX),
- Pimco Income Fund (PIMIX),
Exchange-Traded Funds: ETFs Introduction
An ETF is a collection of assets that anybody can purchase or sell on a stock market through a broker. An ETF is available for every asset class including, traditional stocks, FOREX, and commodities. Furthermore, new ETFs enable investors to short markets, obtain leverage, and dodge short-term capital gains taxes.
Types of ETFs
- Market ETFs
- Exchange-traded notes (ETNs)
- Actively managed ETFs
- Bond ETFs
- Commodity ETFs
- Style ETFs
- Foreign market ETFs
- Sector and industry ETFs
- Inverse ETFs
- Alternative investment ETFs
Exchange Traded Funds (ETFs) Investment: Top Advantages
- High Market Exposure ETFs focus on specific sectors or commodities that might provide exposure to certain market segments. Index mutual funds frequently do not allow for specialty investment.
- Good for Active Traders ETFs allow intraday trading, stop orders, limit orders, and short selling, whereas mutual funds do not.
- Tax Saving ETFs and index mutual funds are both less taxed than actively managed funds. ETFs, in general, can be more tax-efficient than index funds.
Fun Fact: Exchange Traded Funds has registered an amazing 2650% growth rate from 2003 to 2020, with more than 7602 active ETFs.
Mutual Funds: Top Advantages
- Better than Market You're looking for a fund that can outperform the market. The possibility of beating benchmarks (most cannot do it consistently) is the primary reason individuals invest in Mutual funds. Mutual Fund with a specific strategy may also be used to supplement index funds in a portfolio. For example, some mutual funds work with low risk, high return, while others work with high risk, low return.
- More Opportunities You're putting your money into a less efficient sector of the market. Some marketplaces are deemed very "efficient," meaning that the firms or marketplaces are so popular that there are little chances of making money with them. Information spreads fast and broadly. Large-cap U.S. equities are an example of a market sector that is efficient. Emerging market equities and high-yield bonds are less efficient markets where thorough study and a tried-and-true technique can pay well.
Fun Fact: More than $20 Trillion were invested in Mutual Funds alone in 2020.
Difference between Mutual Funds v/s ETFs
- Marketplace Exchange-Traded Funds: ETFs, like stocks, are purchased and sold on an exchange through a broker. Buyers and sellers are matched on exchanges.
Mutual Funds: Mutual funds are purchased from a fund firm directly.
- Price Exchange-Traded Funds: The price of an exchange-traded fund (ETF) keeps changing throughout the day. The market determines the price.
Mutual Funds: Mutual funds are valued once a day & net asset value determines the price.
- Minimum Investment Exchange-Traded Funds: The price of one share is usually the minimum investment in an ETF.
Mutual Funds: Most mutual funds have a minimum investment range of Rs 500 to Rs 500,000.
- Fees and Commissions Exchange-Traded Funds: For ETF purchases and trades, brokers typically charge the regular stock trading commission.
Mutual Funds: Typically, mutual fund firms do not charge a fee when purchasing or selling a fund.
- Fractional Investment Exchange-Traded Funds: Investors may be required to purchase complete shares by some brokers.
Mutual Funds: Mutual fund companies permit fractional shares.
- Tax Implications Exchange-Traded Funds: ETFs are more tax-efficient & investors in exchange-traded funds (ETFs) typically incur tax consequences only when they sell their holdings.
Mutual Funds: If a mutual fund's cash outflows exceed its cash inflows, all shareholders may be subject to capital gains taxes, regardless of whether they sell their shares.
Mutual Funds or ETFs: What to Choose?
So, this was all about ETFs and mutual funds. Remember, both of these fund types combine client funds into a portfolio of securities, allowing investors to diversify their portfolios without having to buy and manage individual assets. However, ETFs are currently the darlings of the investment world. They've grown quickly: in 2003, there were just 123 ETFs to choose from. There are more than 2,000 in the United States today, with more than $4 trillion in assets.
