Are you confused regarding whether to invest in ETFs or mutual funds? Do you wonder which one can assist you attain your financial goals more quickly? Let’s break down the distinctions and view which option may be the better choice for you.
Both exchange-traded funds (ETFs) and mutual funds are popular investment options that enable you to invest in a diversified portfolio of stocks, bonds, or other securities. However, they have distinct features that can impact your investment strategies and returns. Being aware of the key points of distinction between ETF and mutual funds can help you make better decisions.
ETF vs mutual funds – Key differences
Understanding the differences between ETF and mutual funds can help you select the correct option for your financial goal. Read on to understand the distinctions –
1) Trading mechanism
Mutual funds are purchased and sold depending on their net asset value (NAV), which is computed at the end of every trading day. This means you cannot trade them during market hours, and your purchase or sell order will be executed at the day’s closing price.
In contrast, ETFs are traded on the stock exchange throughout the day, just as individual stocks. This enables you to purchase and sell ETF shares at market prices whenever the market is open, offering more flexibility and the ability to react to market movements in real-time.
2) Minimum investment
Mutual funds often require a minimum investment amount. For instance, lumpsum investments in mutual funds typically begin at ₹5,000 while systematic investment plans (SIPs) can start with as little as ₹500 per month.
ETFs can be purchased in single units, making them accessible for retail investors with smaller amounts of capital. This flexibility permits you to invest even small sums, making ETFs an excellent option for beginners or those wanting to invest incrementally. The investment amount in ETFs can be as low as the price of one share.
3) Expense ratios
Usually, mutual funds have higher expense ratios owing to active management by fund managers and other associated fees. These costs can add up over time and eat into your returns.
ETFs typically have lower expense ratios as most are passively managed and track an index. This cost efficiency makes ETF investments enticing for cost-conscious investors looking to enhance their returns.
4) Management style
Actively managed mutual funds are overseen by professional fund managers who aim to outperform the market by choosing and trading securities depending on research and evaluation.
Generally, ETFs are passively managed, tracking an index like the Sensex or Nifty 50. This infers they aim to replicate the index performance rather than beat it, resulting in lower management costs and a more effortless investment strategy.
5) Liquidity
Mutual funds are less liquid as transactions are processed at the end of the day. This can be a drawback if you require access to your funds quickly or take benefit of intraday market movements.
ETFs are highly liquid as they can be traded anytime during market hours. This liquidity endows retail investors with the potential to quickly enter or exit positions, making ETFs a more flexible option for active traders.
6) Investment goals
Mutual funds are suitable for long-term investment goals with expertise management. They offer a range of funds personalized to distinct risk tolerances and investment time frames, making them an excellent choice for investors looking for a managed approach.
ETFs are ideal for both long-term and short-term investments with lower costs. Their passive management style and cost efficiency make them best for retail investors looking to track market indices and attain steady growth over time.
Which is better - ETF or mutual funds?
Selecting between ETFs and mutual funds depends on your investment goals and style. If you prefer active management and are seeking long-term growth, mutual funds may be the correct option. In contrast, if you value lower costs and flexibility in trading, ETFs could be more suitable.
Many investors find value in diversifying their investment portfolio with both ETFs and mutual funds. By doing this, you can benefit from professional management and cost-effective investment. For instance, you could use mutual funds for your core long-term investments and ETFs for specific market exposures or tactical allocations.
Ending note
Like share market investment, both mutual funds and ETFs offer unique benefits that can help you create wealth. Mutual funds offer professional management and are ideal for long-term goals while ETFs offer flexibility, and lower costs. Considering both options can help you create a diversified and balanced investment portfolio.
When it comes to investing in these financial options, there are many brokerage firms that offer an efficient and seamless platform to help you get started. So, do not procrastinate; take the next step towards your financial growth and make the most out of investment opportunities by choosing a leading brokerage firm today!
Disclaimer: This content is part of a marketing initiative. No TNIE Group journalists were involved in the creation of this content.