ETF and Mutual funds are two terms that are so identical yet so different. Though they are both excellent options for investment, it is important to understand the difference between the two and invest in the one that best suits you. In this blog, we will discuss ETF, Mutual Funds, and the difference between the two.
What is a Mutual Fund?
A mutual fund collects money from investors with similar financial goals and invests it in a variety of asset classes. The pooling of resources is the biggest strength for mutual funds and they also have the potential to offer high returns in the long run. There are various mutual funds schemes like open-ended funds, closed-ended funds, interval funds, exchange-traded funds and funds of funds.
Benefits of Mutual Funds
- Professional Management
What is an ETF?
ETF stands for Exchanged Traded Funds and is a type of Mutual Fund. It is a fund that consists of many stocks and can be traded together as one single fund. You can buy and sell the stock anytime the market is open. Another notable benefit is that you can also get access to assets that are difficult to invest in.
For example, if you would like to invest in gold and believe that its value will rise in the future, you can simply buy GLD, the ETF to follow the market price of gold.
Benefits of ETF
- Lower Fees
- Tax Efficiency
- No Minimums
Difference between Mutual Funds and ETF
- When observed closely, both mutual funds and ETFs do the same thing. Both are investment packages but they operate differently.
- ETFs are not open-ended like Mutual Funds. The number of stocks in the ETF remains constant. When you invest or trade in an ETF, you are essentially buying or selling current equities in the market.
- Mutual funds are distinctive as they are open-ended. When investors buy equities, the mutual fund receives their money and it adds the money to the asset pool. New stocks are issued to the individual investor through mutual funds, and the fund’s pool of resources grows.
- Fund management determines the performance of Mutual Funds, whereas the overall market condition determines the ETF performance. ETFs have a low expense ratio, but mutual funds have a high fee ratio.
- You can invest a lump sum via SIP or STP in Mutual Funds. We don’t require monthly, quarterly modes of investment with ETFs. While an ETF can be sold at any time, Mutual Funds have a maturity period that may vary from 2 to 15 years.
Which one to choose?
Market experts would advice you to invest in mutual funds if you are planning to invest for the long term and want to avail flexibility in your investment portfolio. While this is the case, the market experts would suggest you to invest in an ETF fund if you are planning to play with the market volatility and need instant liquidity as it is a better fit for you.
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