Road to Wealth: ETF vs MF

Purab Kumar -

Securing your financial future is one of the most critical tasks that you need to perform. There are many opportunities at your disposal when it comes to investing like Bonds, Mutual Funds, Direct Equity, Gold, etc., but out of soo many opportunities, the ones with moderate to low risk and moderate to high returns can be gained through ETFs and Mutual Funds ⚡

ETFs and mutual funds both pool investor money into a collection of securities, exposing investors to many different securities without having to purchase and manage them 🧘‍♀️

But before jumping to invest in ETFs or Mutual Funds, let’s first understand them in a little more detail 🔍

ETFs

  • Also known as ETF, Exchange-Traded Funds are a type of security replicating a market index composition. These are passively managed funds that merely replicate an index.
  • These funds usually hold all the stocks in the same weight as they are held by the underlying index. ETF is not actively managed by a fund manager. It just tracks the performance of the index.
  • By owning an ETF, you get an index fund's diversification along with a stock's liquidity. To invest in an ETF, all you need is active trading and a Demat account. Since ETFs are traded during market hours, you can purchase a unit of any ETF from the secondary market using your trading account.

Mutual Funds

  • Mutual funds can be described as professionally managed investment schemes that collect money from various investors and then invest it in diversified holdings.
  • Mutual funds trades based on their Net Asset Value (NAV), which changes every day and the units can be bought and sold only based on their price at the end of market hours.
  • They may not be available through all brokerages, but you can purchase them directly from the fund family. Most fund families make it easy to drip in money at set intervals.

But what to choose b/w ETFs and Mutual funds?? 🤔

There may be a lot of debate that can be done on the two but here are some important points to keep in mind as a young mindful investor.

  • How they’re managed
    While actively managed funds may outperform ETFs in the short term, long-term results tell a different story. Between the higher expense ratios and the unlikelihood of beating the market over and over again, actively managed mutual funds often realize lower returns compared to ETFs over the long term.
  • Their expense ratios:
    An expense ratio indicates how much investors pay each year to own a fund as a percentage of the amount invested. Passively managed ETFs are relatively inexpensive. This is considerably lower than actively managed funds. A lower expense ratio can lead to higher returns in long term due to the compounding effect.
  • How they’re traded
    ETFs usually track an index, but they’re index funds with an added advantage. They’re traded throughout the day like stocks, with their prices based on supply and demand. On the other hand, traditional mutual funds, even those based on an index, are priced and traded at the end of each trading day.
  • How they’re taxed
    Because of how they’re managed, ETFs are usually more tax-efficient than mutual funds. When an investor buys an ETF, you won't pay capital gains taxes unless the shares are eventually sold for a profit.
  • The minimum investment
    Mutual funds can have high costs of entry. However, ETFs can be purchased by the share, lowering the cost of establishing a position or adding to an existing one.

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Happy Investing