Mutual Funds vs ETFs

Mutual funds vs ETFs Differences

A variety of investment avenues are existing for investors to grow their money. Mutual funds and ETF’s are two such modes which guide in multiplying investments made with a line of demarcation between them. Mutual funds involve a common financial goal whereby the asset management company will invest the funds accumulated in various securities in the Capital and Money Markets. They are considered to be a safe haven as they follow a given set of strategies with the aim of providing consistent returns above the market rate of return.

ETF’s on the other side is similar to Mutual funds but get traded on the stock exchange.

Let us have a detailed discussion on them including their differences between mutual funds versus ETFs.

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Mutual Funds vs ETFs Infographics

Below infographics enlists the top 7  Mutual fund vs ETFs differences.

Mutual Funds vs ETFs – Key Differences

Let us understand the differences between ETFs vs Mutual Funds in detail:

1. Mutual funds are a pool of investment from various investors which will further invest in the stock market on behalf of the investors. The investment will be made in diversified securities with the objective of offering returns greater than the risk-free rate of return prevailing. On the other hand, an ETF is an investment fund traded on the stock exchange. These ETF’s track an index like the stock index/bond index.
2. Mutual funds involve the trading of share proceeds from the fund house whereas ETF’s involves trading activities between two investors in the secondary market.
3. The average expenses ratio of mutual funds is relatively higher since they are tracking multiple indexes and securities whereas ETF’s track a particular index and adopt a passive strategy which further reduces the average expense ratio. This aspect can further improvise on the return on investments offered.
4. Mutual funds are actively managed by the designated fund managers who are responsible for continuously buying and selling of securities to exceed the expected returns. ETF’s follow a passive management style since they are matching a specific index and wait for the opportunity before taking a decision.
5. Any sale or redemption in a mutual fund leads to a higher level of capital gains tax in comparison to ETF’s. Thus, ETF’s have greater tax efficiency due to the structure which permits to substantially decrease or avoid capital distributions.
6. A share trading account is not mandatory while purchasing a mutual fund but since ETF’s are traded on the stock market, a share trading account becomes mandatory.
7. Mutual funds are traded on the Net Asset Value (NAV) which is quoted at the end of the day but an ETF is traded throughout the day such as stocks.
8. Mutual funds do not involve any brokerage fees but are applicable in case of ETF.

Mutual Funds vs ETFs (Comparison Table)

Basis of Comparison – Mutual funds vs ETFs	Mutual Fund	ETF’s
Meaning	It is an investment vehicle which is managed in a professional manner. The resources are pooled from multiple investors and traded on behalf of clients.	An investment scheme tracking the index. They are further listed and traded on the exchange.
Management Style	Active but within limits as mentioned in the Prospectus	Passive style
Requirement of Trading Account	Not essential	Required for transactions
Tax burden	Capital gains tax is high due to frequent trading	Comparatively, lower tax is imposed
Brokerage	Not applicable due to direct purchase of the funds	It is required to be paid
Expenses	High expenses ratio	Expenses are less since they are not actively traded causing ratios of expenses to fall.
Trading activities	Occurs within the fund house	Executed to and from the investors in the markets.

Conclusion

After detailed discussion above, both Mutual Funds and ETF’s are similar investment patterns with the aim being to maximize the profits from the investments received. Both have their pros and cons and depending on the risk-taking ability and the desired strategy of the investors, either of the instruments can be pursued.

Another benefit is that both Mutual funds and ETF’s can be included in the individual portfolio to maximize returns.

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