Mutual Funds vs ETF

Exchange-traded funds (ETFs) and mutual funds are both investment vehicles that can help with diversification and growth, but they have several differences. ETFs trade on an exchange throughout the day, like stocks, while mutual funds are only traded once a day after the market closes.
EXPLORE FUNDS
Difference Between ETF and Mutual Fund
EXPLORE FUNDS
3 mins read
11-October-2024

Typically, both exchange-traded funds (ETFs) and mutual funds offer investment options, but they differ in management styles. Mutual funds are often actively managed investments, although passive investment funds, such as index funds, have gained popularity. In contrast, ETFs are usually passive investment funds, tracking market indices or sector sub-indices. Unlike mutual funds, ETFs can be traded like stocks throughout the trading day, providing greater flexibility for investors.

In this article, we’ll explore the key differences between Mutual Funds and ETFs, helping you understand how each investment option works and which might be the better choice for you in 2024. We'll cover the pros and cons of each, considering factors like cost, flexibility, and performance, so you can make an informed decision in today’s dynamic market.

Difference between Mutual Funds vs ETFs

When it comes to investment opportunities, mutual funds and exchange-traded funds (ETFs) stand as two prominent options, each offering unique benefits. While both provide exposure to a diversified portfolio of securities, their operational mechanisms and management styles differ. Understanding these differences can help investors make informed decisions based on their financial goals and risk tolerance.

Here are five key points to consider when comparing ETFs and mutual funds:

  • Investment approach: ETFs are passive investment funds designed to track an underlying index or asset. In contrast, mutual funds are actively managed investments, where fund managers aim to outperform the market by making strategic buying and selling decisions.
  • Trading flexibility: ETFs trade on stock exchanges throughout the day, allowing investors to buy or sell shares at market prices during trading hours. On the other hand, mutual funds are traded only once daily, based on the Net Asset Value (NAV) calculated at the end of the trading day.
  • Cost efficiency: Both ETFs and mutual funds offer low-cost access to a diversified portfolio, but ETFs typically have lower expense ratios due to their passive nature. Actively managed mutual funds may incur higher fees, as they require ongoing market analysis and decisions from fund managers.
  • Liquidity and accessibility: ETFs offer greater liquidity, as they can be traded like stocks during market hours. Mutual funds, however, provide convenience for investors who prefer not to engage in direct market trading, as transactions are handled through fund houses.
  • Investment planning tools: Investors can use tools like the SIP calculator and lumpsum calculator on the Bajaj Finserv platform to effectively plan and evaluate their investment strategies. These tools help assess potential returns and ensure alignment with long-term financial objectives.

ETF vs Mutual Funds - A table comparison

When considering the differences between ETF and mutual funds, investors encounter distinct characteristics that shape their investment choices. ETFs trade on stock exchanges like any other stock, providing high liquidity, while mutual funds are transacted at the end of the day at the NAV price, impacting their liquidity. Additionally, ETFs generally feature lower expense ratios compared to the higher management fees associated with mutual funds.

Key difference between ETF and mutual fund

ETF

Mutual fund

Trading And Liquidity

ETFs are traded on the stock exchange like any other stock, making them more liquid.

Mutual funds can only be bought or sold at the end of the day at the NAV price.

Cost Structure

ETFs have lower expense ratios.

Mutual funds have higher management fees.

Investment Approach

ETFs are passively managed, mirroring a particular index, making them less risky and transparent.

Mutual funds are actively managed, with fund managers investing based on analysis and market outlook.

Minimum Investment

ETFs allow investors to start with smaller amounts.

Mutual funds typically require a higher minimum investment.

Taxation

ETFs are more tax-efficient with lower capital gains tax.

Mutual funds are less tax-efficient.

Diversification

ETFs offer more targeted investments mirroring specific indexes.

Mutual funds provide more diversification options and exposure to a broader range of securities.


Through these differences, investors can evaluate ETF vs mutual fund options to align with their investment goals and risk tolerance levels. While ETFs offer advantages in liquidity, cost, and tax efficiency, mutual funds provide active management and diversification benefits. Hence, the choice between ETFs and mutual funds depends on individual preferences and financial objectives.

Similarities between ETFs and mutual funds

When comparing similarities between ETFs and mutual funds, several similarities emerge, making them both attractive investment options:

  • Diversified structure: Both mutual funds and ETFs offer investors access to a diversified portfolio of assets, which helps spread risk.
  • Professional management: Both investment vehicles are managed by experienced professionals who make investment decisions on behalf of investors.
  • Variety of choice: Investors can choose from a wide range of mutual funds and ETFs, allowing them to select options that align with their investment objectives and risk tolerance levels

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Types of ETFs and mutual funds

Understanding the various types of ETFs and mutual funds is crucial for investors to align their investment strategies with their financial goals and risk preferences. Here's an overview of the different types:

Types of ETFs

Type of ETF

Description

Equity ETFs

These ETFs invest primarily in stocks of various companies, providing investors with exposure to specific sectors, regions, or market indices.

Bond ETFs

Bond ETFs invest in fixed-income securities such as government bonds, corporate bonds, or municipal bonds, offering investors income generation and diversification.

Sector ETFs

Sector ETFs focus on specific sectors of the economy, such as technology, healthcare, or energy, allowing investors to target industries they believe will outperform the broader market.

Commodity ETFs

Commodity ETFs invest in physical commodities like gold, silver, oil, or agricultural products, providing investors with exposure to commodity prices without the need for direct ownership.

International ETFs

International ETFs invest in stocks or bonds of companies located outside the investor's home country, offering diversification and potential growth opportunities in global markets.


Types of mutual funds

Here is a list of different types of mutual funds and some information about each type:

Type of Mutual Fund

Description

Equity Funds

Equity funds primarily invest in stocks, aiming for capital appreciation over the long term. They can be further classified based on market capitalization (large-cap, mid-cap, small-cap) or investment style (growth, value, blend).

Debt Funds

Debt funds invest in fixed-income securities such as government bonds, corporate bonds, or money market instruments, providing regular income and capital preservation.

Hybrid Funds

Hybrid funds, also known as balanced funds, allocate investments across both stocks and bonds, offering a balanced approach to risk and return.

Index Funds

Index funds replicate the performance of a specific market index, such as the S&P 500, by investing in the same securities in the same proportion as the index components.

Tax-Saving Funds (ELSS)

Equity Linked Savings Schemes (ELSS) are tax-saving mutual funds that offer tax benefits under Section 80C of the Income Tax Act, along with the potential for long-term capital appreciation through equity investments.


By understanding the characteristics and objectives of each type of ETF and mutual fund, investors can make informed decisions to construct a well-diversified investment portfolio tailored to their needs.

Mutual Fund vs. ETF Redemption Example

In a mutual fund, redemptions are processed at the end of the trading day based on the Net Asset Value (NAV). For instance, if an investor requests redemption before the cut-off time, the sale will be executed at the day's closing NAV. Conversely, ETFs allow real-time redemptions throughout the trading day, similar to stocks. For example, if an investor wishes to sell ETF shares at noon, the transaction occurs instantly at the current market price. Mutual funds offer a fixed end-of-day price, while ETFs provide flexibility with fluctuating intraday market prices.

ETF or mutual fund? Which is right for you?

Choosing between an ETF and a mutual fund depends on your investment goals and preferences. ETFs are ideal for those seeking flexibility, as they trade like stocks throughout the day and often have lower fees. They suit investors focused on passive, low-cost investing. Mutual funds, on the other hand, are better suited for those preferring professional fund management aimed at outperforming the market. They are traded based on the daily Net Asset Value (NAV) and may involve higher fees. Ultimately, your risk tolerance, investment strategy, and desire for hands-on management will guide your choice.

Key takeaways

  • Mutual funds and ETFs are both popular investment options that provide diversified portfolios managed by professionals.
  • The main difference lies in their management and trading mechanisms.
  • Mutual funds are actively managed and traded at the Net Asset Value (NAV) at the end of the day, while ETFs are passively managed, tracking indices and can be traded throughout the day like stocks.
  • ETFs generally have lower expense ratios, better liquidity, and are more tax-efficient compared to mutual funds.
  • On the other hand, mutual funds offer more diversification options and the potential for active management to outperform the market.
  • Both investment options cater to different investment objectives and risk tolerances, making them suitable for various financial goals.

Understanding these differences is crucial for optimizing investment strategies.

Conclusion

During investing, ETFs and mutual funds stand out as popular choices, each offering unique advantages and considerations. While ETFs provide liquidity, lower expense ratios, and tax efficiency, mutual funds offer active management and broader diversification. Understanding the differences between ETFs vs mutual funds is crucial for investors to align their investment strategies with their financial goals and risk tolerance levels. Ultimately, the decision between the two investment vehicles depends on factors such as investment objectives, time horizon, and personal preferences. Investors can leverage the Bajaj Finserv Mutual Fund Platform to access a diverse range of investment options, with over 1000 mutual funds listed, also giving you the option to compare mutual funds empowering them to make informed decisions tailored to their unique financial aspirations. Fund managers too play an important role in determining the investment habits of an investor.

By carefully assessing the pros and cons of each option, investors can make informed decisions to build a diversified portfolio tailored to their individual needs and preferences.

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Frequently asked questions

Is it better to invest in ETF or mutual fund?

Both ETFs and mutual funds offer distinct advantages. ETFs provide liquidity and lower expense ratios, while mutual funds offer active management. The choice depends on individual preferences, financial goals, and risk tolerance.

What is the difference between mutual fund NAV and ETF NAV?

The Net Asset Value (NAV) of mutual funds is calculated at the end of the trading day, while ETF NAV fluctuates throughout the trading day as ETFs are traded on exchanges like stocks.

What are the disadvantages of ETF?

ETFs may incur brokerage fees, bid-ask spreads, and tracking errors. Additionally, ETFs may not be suitable for frequent trading due to potential commission costs.

Why choose an ETF over mutual fund?

Investors may prefer ETFs for their intraday trading capability, lower expense ratios, tax efficiency, and transparency in holdings. They also offer diversification and access to specific sectors or asset classes.

Do ETFs grow faster than mutual funds?

The growth of ETFs vs. mutual funds depends on various factors such as market conditions, investment strategies, and fund performance. There's no inherent guarantee that ETFs will grow faster than mutual funds.

Why are mutual funds more expensive than ETFs?

Mutual funds often have higher management fees due to active management and higher administrative costs. ETFs, being passively managed and traded on exchanges, generally have lower expense ratios.

What are two advantages of an ETF over a mutual fund?

ETFs offer intraday trading flexibility and typically have lower expense ratios compared to mutual funds. Additionally, they are often more tax-efficient due to their unique structure.

Is ETF better than a mutual fund?

Both have distinct advantages; ETFs offer intraday trading and usually lower fees, while mutual funds may provide more active management and potentially higher returns over time.

Is an ETF riskier than a mutual fund?

Risk levels vary based on the underlying assets; ETFs' ability to trade intraday can expose investors to market volatility, while mutual funds might carry higher expense ratios or specific risks depending on their investment strategies.

Is ETF tax-free?

ETFs are subject to taxation on gains like capital gains tax, dividends, and interest income, similar to mutual funds, depending on the holding period and type of gains realised.

What is ETF in India?

Exchange Traded Funds (ETFs) in India are investment funds listed and traded on stock exchanges, mirroring indices like Nifty, Sensex, or specific sectors, offering investors diversification and liquidity.

Which ETF is best in India?

The best ETF in India depends on individual investment goals, risk tolerance, and market conditions; popular choices include Nifty 50 ETFs, Sensex ETFs, or sector-specific ETFs like banking or technology.

Which ETF has the highest return?

ETF returns vary over time and depend on market conditions; historically, ETFs tracking high-performing indices or sectors during bull markets tend to yield higher returns.

What is the difference between exchange-traded and mutual fund?

Exchange-traded funds (ETFs) trade on stock exchanges throughout the day, while mutual funds are bought or sold at the net asset value (NAV) at the end of the trading day, and ETFs often have lower expense ratios than mutual funds.

Which is an advantage exchange-traded funds have over mutual funds?

ETFs offer intraday trading, potentially lower fees, and tax advantages through in-kind creations and redemptions, providing investors with greater flexibility and liquidity compared to mutual funds.

Does ETF have exit load?

Unlike mutual funds, ETFs typically do not have exit loads, which are fees charged when investors redeem their investment, contributing to their appeal for short-term traders and investors.

How to choose a mutual fund?

Consider factors like investment goals, risk tolerance, fund performance, expense ratios, and fund manager track record when choosing a mutual fund, ensuring alignment with your financial objectives and preferences.

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