Both Mutual Funds (MFs) and Exchange-Traded Funds (ETFs) have things in common: they are regulated by SEBI and they offer access to a variety of securities such as stocks, bonds and gold.
Before deciding whether to invest in a mutual fund or exchange-traded fund (ETF), you may want to consider the key differences between the two types of funds:
ETFs
What are they
Basket of securities that replicates an underlying index like the NSE or BSE or commodities such as gold or sectors, industries or a pool of assets.
Who is it for
Ideal for investors with small amounts of capital to invest.
Benefits
Passive management, low-cost, diversification, and convenience
Pricing: Real-time
You are able to view their prices in real-time like regular stocks and take buying/selling decisions at the right price as per the latest markets news and updates
When you can trade: Real time
ETFs can be sold right away over an exchange, that provides you instant liquidity
How to invest
Stock market or AMC via Demat account
Expense Ratio
As ETFs merely replicate the performance of an index, they do not need active management and hence have low fees and expenses.
Charges upon Exit: Nil or marginal
ETFs generally don’t levy exit loads or penalties when you want to leave the fund, however you are still required to hold an ETFs for certain minimum number of days.
Flexibility
You are free to move in and out as per the market conditions.
Where to redeem
Stock market or AMC
Liquidity
ETFs can be sold right away over an exchange
Taxation
ETFs don’t allow you tax savings under section 80C.
Direct Mutual Funds
What are they
Professionally managed investment schemes that collect money from various investors and then invest it in diversified holdings such as stocks, bonds, gold, etc.
Who is it for
Ideal for busy working professionals who are looking for schemes depending on their investment objectives, horizon or risk appetite
Benefits
Actively managed by professional and provides diversification
Pricing: Real-time
You get to buy/sell the units at fund’s Net Asset Value (NAV), computed at the end of the day’s trading session. This however, depends on the cut off time and differs across scheme categories.
When you can trade: 1-2 days
When you want to redeem your investments from mutual funds, the AMC generally takes 1-2 days to complete the entire process.
How to invest
Stock market or AMC
Expense Ratio: Higher Fees
Mutual funds are actively managed and this tend to have higher fees and higher expense ratio.
Charges upon Exit: Exit loads, if any
Mutual funds include charges if you want to exit the fund.
Flexibility
You can diversify as per your investment objective, horizon, risk appetite.
Where to redeem
AMC
Liquidity
Certain Mutual funds schemes can have lock in period and exit load.
Taxation
ELSS funds allows you tax benefits u/s 80C Mutual funds.
How to decide between Mutual Funds and ETF
Both of the investment options mentioned above offer you an excellent way to build a diversified investment portfolio. In many ways mutual funds and ETFs do the same thing, so the better long-term choice depends a lot on what the fund is actually invested in (the types of stocks and bonds, for example). As to which option should be chosen, there are many factors that need to be considered, such as:
Need for Liquidity
If you are planning to invest for long term and want to avail flexibility in your investment portfolio, you can invest in mutual funds. If you are planning to analyze the market movements and need instant liquidity, then investing in ETF is a better fit for you.
Your risk appetite
If you’re not a hands-on investor, you may be happier in a mutual fund, which relies on a professional to automatically rebalance for you, and is less risky than investing in direct equity.
As with any investment, you should thoroughly research any investment option before committing. This means monitoring how the fund performs under different market conditions and taking a look at the assets held in the funds. An asset allocation considering mix of ETFs and mutual funds of different asset classes can prove to be beneficial to your investment portfolio.
Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.