Investing

Mutual Funds vs ETFs: What are the Differences and Which One Should You Choose

Securing your financial future is probably one of the most critically important tasks of your life. There are various options available for you to make sure that your money generates adequate returns as per your financial goals. Out of the various investment options available to investors, Mutual Funds and ETFs are two of the most popular ones. They both look quite similar when you glance at them initially, but when analyzed carefully, there are differences between both of them. Let’s try and understand the difference between these two investment options and understand which one among these is the best for you.

Wealthface help you to build diversified portfolios from multiple ETFs of the most reputed global companies like Black rock, vanguard, SPDR and State street at low cost.Using a Nobel prize-winning academic research to diversified in different asset allocation and protect the client capital in the long term to attend and achieve their financial goals.

Wealthface help you to build diversified portfolios from multiple ETFs of the most reputed global companies like Black rock, vanguard, SPDR and State street at low cost.Using a Nobel prize-winning academic research to diversified in different asset allocation and protect the client capital in the long term to attend and achieve their financial goals.

Wealthface helps you build diversified portfolios from multiple ETFs of the most reputed global firms like Black Rock, Vanguard, SPDR and State Street at low costs. Wealthface uses a Nobel Prize-winning academic research to diversify the client’s capital into different asset groups and protect the client’s capital in the long term to help clients attend to, and achieve their financial goals.

Mutual Funds vs ETFs: Things You Need to Know

What are Mutual Funds?

Mutual funds are often described as professionally managed investment schemes that collect money from various investors then invest it in diversified holdings. Mutual funds invest within a wide selection of securities like stocks, bonds, debt instruments and far more. Each scheme features a defined NAV (Net Asset Value) which springs after dividing the entire investment of the mutual fund by the amount of investors.

What are ETFs?

ETFs or Exchange Traded funds are funds that are passively managed and funds which  replicate indices. These funds usually hold all the stocks within the same weight as they’re held by the underlying index. ETFs aren’t actively managed by a fund manager. Only the performance of the index is tracked. ETFs are actively traded on a stock market and may be freely purchased and sold throughout the trading session.

Mutual Funds vs. ETFs

The choice between a mutual fund and an ETF is a conundrum that plagues investors of all kinds when they make important decisions associated with investment. While both of them might appear similar on the surface, there are definitely a lot of stark differences between them. 

These are the main differences between Mutual Funds and ETFs:

  • Flexibility:  ETFs are freely traded within the market and may be bought and sold as per the investor’s convenience. Their market value is out there in real-time (a bit like ordinary equity shares). Mutual funds units are often bought or sold only by placing an invitation with the fund house. NAV indicates the price of 1 unit of a mutual fund .
  • Fees and Expenses:  As ETFs merely replicate the performance of an index, active management is not required for them. As a result, the fees and expenses related to ETF investments are low. With regards to Mutual Funds, the fund manager actively takes investment decisions on behalf of the investors. The fund management expenses tend to be on the higher side as a result.
  • Commissions:  As ETFs are traded like all other shares on the exchange, investors are required to pay commissions on the sale and purchase of units as per the prevailing rules. Conversely, in the case of mutual funds, there’s no requirement for paying any commission for the sale and purchase .
  • Management:  Mutual funds are generally managed by an experienced fund manager who is incharge of all the decisions on behalf of the investors. As far as ETFs are concerned, the funds merely track the market index. There are some actively managed ETFs also, but they need a better expense ratio.
  • Lock-in Period:  ETFs don’t have a minimum holding period, and therefore the investors have the freedom to sell the investment whenever they want to. Mutual funds like ELSS (Equity Linked Savings Scheme) accompany a lock-in period of three years. During this timeframe, it’s impossible to liquidate the investment. This can range from 9 days to three years, depending on the selected mutual fund scheme.

How to decide between Mutual Funds and ETFs

Both of the investment options discussed in this article are great for building a diversified investment portfolio. As to which option should be chosen, there are many factors that require to be considered, such as:

  • Ease to liquidate the investment
  • Your risk appetite
  • Your investment horizon
  • The tax-saving strategy that you have.
  • Your financial goals

When you have answered these questions, you’ll be ready to narrow down on which of the above two options you want to choose. ETFs provide you with more flexibility and better returns within the short-run while mutual funds require you to remain invested for a relatively extended period but help create a corpus for the future. The decision has got to be entirely yours but must be taken after careful consideration.

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