Mutual funds and ETFs or Exchange-traded funds both are types of funds that use pooled money. They strive to make investments and subsequent wealth generation for investors. As they have a similar concept of pooled money as origin, they are bound to have some similarities.
Let us look at the similarities first.
- Both used money that is gathered from different investors and invested elsewhere
- They can have from 1000 to 3000 securities as a part of their fund
- The market crash of 1929, laid the guidelines for both these funds
Thus, the similarities as evident are very basic. The two have significant dissimilarities as well. Both are great investment options. But they will cater to the interest of different types of investors, depending on their personal investment preferences.
The noteworthy differences are the following.
Origin – The mutual fund origin at least in the United States can be traced to the 1929s. The ETFs have a comparatively newer origin, dating to the 1990s.
Fund manager – Mutual funds are known best because they have fund managers. These managers develop strategies and work actively in growing the pooled money. While ETFs are passive funds. They are indexed and work with a market index.
Buying and selling – When an investor wants to buy or sell a mutual fund, then he or she will have to do so directly with the fund company. For ETFs, investors can buy or sell from other investors. This process is similar to stocks buying and selling the system.
Time of trading – Mutual funds are traded at the end of the day. This suits many investors depending on their reason to invest. End-of-day trading is beneficial for many investors who would like to liquidate their funds in times of need.
ETFs can be traded intra-day. This suits investors who can be watchful of the trends of the day. Some investors find it more beneficial as they want to make the most of any opportunity that would present throughout the day.
The time of trading cannot determine which option is better, but it gives investors an idea of which one suits them better.
Stock orders – ETFs allow stock orders to be made. This allows many investors to modify their investment plans. This flexibility is not available with mutual funds. An investor cannot give stock orders like stop loss. It is not applicable as it is a limited order. Mutual funds can not have any limit orders. If an investor is not comfortable with not having the security of stock orders then mutual funds may not be a good investment choice for them. They should consider investing in ETFs.
Expense ratios – This means the amount or fees a fund house charges for managing each unit of the investment. Mutual funds being actively managed funds will incur an expense ratio higher than ETFs as the latter is not actively managed. Naturally, the ETFs will not have that expense. ETFs also have lower amount of transaction fees. It is because not much trading is required with the ETFs. On the other mutual funds will have the investor trade more and incur greater fees.
Many investors compare the expense ratio between different funds and make their investments. That is the sound decision to take.
Tax advantage – ETFs can offer more tax advantage in comparison to mutual funds. The reason is mutual funds provide capital gains distribution which is not available with ETFs. The tax advantage will not be significant but a slight benefit cannot be ignored.
Online brokerages like Kotak Securities lets you choose your investment plan. Take your pick from ETF or mutual funds investment. Online access to investing has made it easier for individuals who do not have adequate time to follow the best practices of investment.