Investments are an essential tool to generate income and reach financial stability in life. Exchange-Traded Funds (ETFs) and mutual funds are good investment options for beginners not willing to expose themselves to high risks or investors looking to diversify their investment portfolios. There are many similarities and differences between ETFs and mutual funds, making them suitable for different investment strategies.
Management structures
In simple words, ETFs can be described as “baskets of stocks.” A fund provider designs an index consisting of a few types of commodities (bonds, gold, companies, etc.) by tracking their performances in the market. Followingly, investors can buy a portion of this index and own a share of the ETF. This makes ETFs a great way to invest in multiple shares in a single transaction through digital bank accounts.
On the other hand, mutual funds describe an “investment program” funded by a group of people. The funds are professionally managed and invested daily into different assets by a fund manager to reach specific returns goals. Right off the bat, the differences arise at the management level whereby a fund manager manages mutual funds while ETFs do not have any active managers.
Capital value
Mutual funds generally require a higher capital compared to ETFs. Usually, there isn’t any minimum investment value for ETFs—you can start with as little as INR 2500 in some ETFs! However, the minimum investment value for mutual funds depends on your monetary goals. The higher your targets are, the higher the initial investments. In fact, in 2019, the average expense ratio for mutual funds was 0.52%, whereas that of ETFs was only 0.18%.
Holding period
The amount of time an investor holds onto an investment is known as the ‘holding period.’ In terms of ETFs, no minimum holding period or corresponding penalties are imposed on investors. This is because the market price of ETFs is constantly valued throughout the day. Therefore, trading ETF shares in short time intervals is possible. It also makes it easier for investors to adjust their portfolios as they see fit any time of the day.
On the contrary, mutual funds orders are only processed once a day to ensure all investors receive the same value. This is because the value of funds is only calculated once daily. The value of mutual fund shares is determined by the Net Asset Value (NAV) daily after the market closes. Any trade orders put in after this time will not be executed until the next day.
Moreover, transactions between mutual funds to digital bank accounts take a longer time compared to ETFs. This is because mutual fund transactions involve extensive collaboration between two firms resulting in a slower process pace.
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Mutual funds and ETFs are equally good in their own unique ways. That said, many factors come to play in choosing a suitable first investment strategy. So, always weigh on the pros and cons of mutual funds and ETFs before making a final decision.
For example, if you’re looking to trade your stocks actively, ETFs complement your investment strategy. Alternatively, if you’re seeking long-term investments and don’t have the time to choose stocks yourself, mutual funds may be a better choice for you.
“In investing, what is comfortable is rarely profitable.” — Robert Arnott
Investing may seem like a foreign and uncomfortable step to get involved in at first. But you should seek to learn more about investments, diversify your portfolio and develop investment strategies that work for you.
| Mutual Funds vs. ETF | |
| Mutual funds are an “investment program” that pools money from several investors. | ETFs are a “basket of stocks” selected by a fund provider. |
| Mutual funds are actively managed by a fund manager to reach specific return goals. | ETFs are passively managed and track a market index like stocks. |
| Mutual funds generally require a higher minimum investment. | ETFs have none or low minimum investment requirements in most cases. |
| Mutual funds generally have a holding period. | ETFs generally don’t have a holding period and allow trading in short time intervals. |
| Mutual funds can benefit investors that don’t want to choose stocks themselves. | ETFs are a good option for investors that want to trade stocks actively. |
| Mutual funds make long-term investments easier. | ETFs are suitable for day trading. |