Difference Between Mutual Funds and ETFs

As they say, you build habits, and eventually, those habits build you.

Investing your capital in various assets is one such habit that will pay you back by helping you live comfortably and achieve various financial goals throughout your life. While you would like to begin as soon as a friend mentions that he made good returns on a particular investment, the reality is more complicated than simply jumping in.

The world of investing often appears to be confusing, filled with jargons, and full of seemingly complicated investment products. The good part is that new-age Fintech companies are making online investing fast, secure, and simple. While there are several securities you can invest in, let us understand two interesting and most talked about, investment products:

1. Exchange Traded Funds (ETFs)
2. Mutual Funds.

As an investor, when you do not have time or know-how to track the capital markets regularly, you would trust your money with someone who does this for a living. For this, you should tap into investment products that offer good diversification, often mitigating risks, that are managed by experienced fund managers. You may want to invest in ETFs or mutual funds when you start your investing journey, these are low-cost, low-risk investment products. 

Similarities between Mutual Funds and ETFs

1. Originating from the idea of pooled fund investing, both mutual funds and ETFs offer investors a great way to invest actively and passively. 
   
2. Both the fund types benefit from the economies of scale, which help in reducing the transaction costs, and eventually the fund management fee.

Difference between Mutual Funds and ETFs

1. The biggest difference is that ETFs can be bought or sold like stocks via a Demat Account, while mutual funds can only be bought or sold at the end of the trading day. Investors who prefer real-time trading typically rely more on ETFs than mutual funds.
   
2. Mutual funds are actively managed and tend to have a higher fee, while ETFs are mostly passive funds tracking an index and charge a lower fee.

While mutual funds have existed longer than ETFs, the popularity of ETF is increasing because of its lower operating cost and easy access to online investing.

Today, if you wish to create a portfolio by investing in ETFs only, you can easily do so with more than 100 ETFs in the Indian capital markets.

Types of ETFs for investors

1. Equity ETFs

• Sensex/Nifty
• International ETFs
• Multifactor ETFs
• ESG ETFs
• Shariah ETFs
• Sectorial ETFs (Banking, Infrastructure, IT & Consumption)

2. Debt ETFs

• Government Bond ETFs (Gilt)
• PSU Debt
• State development loan
• Liquid ETFs

3. Commodity ETFs

• Gold ETFs
• Silver ETFs

Parting thoughts

When you invest in ETFs, you get various benefits of diversification at a very low cost. If you are looking to invest for the long term, index-tracking ETFs are great assets. One key piece of research you must do when you are ready to invest in ETFs is to check the tracking error. Lower the tracking error, better the ETFs performance.

Here is a similar article on Fixed Deposits vs Stocks that can give you good insights if you have just begun your investment journey in the capital market.

Happy investing 😇

Disclaimer: This blog is not to be construed as investment advice. Trading and investing in the securities market carries risk. Please do your own due diligence or consult a trained financial professional before investing.