What are the differences Between Mutual Fund and ETF?
Both mutual funds and exchange-traded funds are pooled investment instruments. While mutual funds are managed actively, ETFs are managed passively. Mutual funds are handled by professionals, whereas ETFs replicate an underlying securities index.
Mutual funds have a minimum investment requirement. They are sold or purchased directly from mutual fund companies. The purchase and sale of ETFs, on the other hand, are channelized through brokers. ETFs are traded in the secondary marketsSecondary MarketsA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them. and have no minimum investment limit.
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Comparative table – Mutual Funds Vs ETFs
Mutual funds vs ETFs, head to head comparison is as follows:
|ETFs (Exchange Traded Funds)
|Investors’ funds are handled professionally and put into various securities, bonds, and equity
|This investment product replicates the performance of an underlying index—securities, stocks, gold, bonds, etc
|Equity, bonds, money market funds, and short-term debts
|Equity, commodity, bonds, gold, and currency
|Usually between 1.5% to 2.25%
|As low as 0.25%
|No short selling or margin trading
|Short selling and margin trading
|Exchanged through mutual fund companies
|Brokers trade it in the secondary market, just like other stocks
|Not Applicable; a single unit can also be purchased
|Fees or Charges
|Brokerage fees, sales commission, operational fees, and redemption fees are applicable
|Commission on each transaction
|Automatic Withdrawal and Investment
|Possible through systematic investment plans (SIPs)
|Priced at the end of trading day
|Tax charged separately on capital gains from the sale of mutual funds
|Capital gains get added to personal income
What are Mutual Funds?
Mutual fund managers actively manage investments. Mutual fund houses collect money from various small investors—the accumulated sum is bundled into diversified securities, stocks, commodities, bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period., money market instruments, and short-term debtsDebtsDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state..
Mutual fund companies uniformly divide overall investment into small units. Then, depending on the contribution, investments are proportionately allotted to each investor. The funds are further classified into open-ended mutual fundsOpen-ended Mutual FundsAn open ended mutual fund allows investors to invest, withdraw or redeem their investments on any business day. The net asset value (NAV) per unit can be used to buy shares directly from the fund. This investment instrument tends to be the best alternative for those looking for intermittent liquidity, portfolio diversification, and higher returns. and closed-ended mutual funds.
What are ETFs?
An Exchange Traded Fund (ETF)Exchange Traded Fund (ETF)An exchange-traded fund (ETF) is a security that contains many types of securities such as bonds, stocks, commodities, and so on, and that trades on the exchange like a stock, with the price fluctuating many times throughout the day when the exchange-traded fund is bought and sold on the exchange. refers to a passively managed basket of assets that track a securities index to replicate its returns. It is listed and traded on the stock exchangeStock ExchangeStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ. like equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet.. It includes assets, security commodities, currency, stocks, and bonds. It is available for short sellingShort SellingShort Selling is a trading strategy designed to make quick gains by speculating on the falling prices of financial security. It is done by borrowing the security from a broker and selling it in the market and thereafter repurchasing the security once the prices have fallen. and margin trading. This is done in the secondary market.
Mutual Funds vs. ETFs Infographics
Let us look at the Mutual Funds vs ETFs infographic for a better understanding.
Let us look at some mutual funds vs ETFs similarities. Both are similar investment schemes that put the investors’ funds into a securities bundle. They offer similar returns and risks which depend on the underlying securities basket.
Moreover, these investment vehicles are governed by the Securities and Exchange Act, 1934; Securities Act, 1933; and the Investment Company Act, 1940.
Now, let us discuss mutual funds vs ETFs differences in detail:
- Mutual funds are accumulated from various investors. On the other hand, an ETF is traded on the stock exchange.
- Mutual funds are managed actively. ETFs function passively—by tracking the performance of the underlying securities index.
- Mutual funds are purchased directly from a company; Investors exchange ETFs in the secondary market by employing a broker.
- The trading structure of mutual funds is more complicated than the ETFs. Mutual funds require a trading account. They are restricted from frequent buying and selling.
- Mutual funds have a higher expense ratioExpense RatioMutual Fund Expense Ratio is the percentage amount charged by the fund manager in exchange of the services provided. The charges include management expense, advisory fees, travel cost, consultancy charges, however, brokerage cost for trading in excluded., ranging between 1.5% and 2.25%—ETFs have an expense ratio of 0.25%.
- Most mutual funds have a minimum investment limit. In contrast, an investor can even buy a single unit of ETF.
- Mutual funds involve fees for brokerageFees For BrokerageA brokerage fee refers to the remuneration or commission a broker obtains for providing services and executing transactions based on client requirements. It is usually charged as a percentage of the transaction amount., sales commission, operation, and redemption. ETFs only require a broker’s commission on transactions.
- Investors can acquire mutual funds through SIPs, where a certain sum is automatically withdrawn from the investor’s account and invested in the desired scheme. ETFs do not provide such a facility.
- The current price of a mutual fund is determined at the end of the trading day. ETFs are subject to real-time pricing.
- ETFs are more efficient when it comes to taxes. Gains from mutual fund sales are taxed separately, whereas ETF sales just get added to the individual’s taxable incomeTaxable IncomeThe taxable income formula calculates the total income taxable under the income tax. It differs based on whether you are calculating the taxable income for an individual or a business corporation..
This has been a guide to Mutual Funds vs ETFs. Here we discuss difference between Mutual Funds & ETFs & compare their performance to find which is better. You may also take a look at the following articles for further details –