Mutual Funds vs ETFs: Which One to Choose?

Work, earn, spend and repeat. This is a very simplistic outline of the life cycle of most people in the present-day world. But this outline is missing a key ingredient that is crucial for achieving certain life goals- investing. People invest their money in different tools and options with varying objectives in mind. While some may look at investment simply as a means of wealth creation and money management, others view it from the perspective of building a retirement corpus. The reasons may vary but the end game is to make more money using your hard-earned money.

And two much-talked about investment packages that people are increasingly opting for these days are Mutual Funds (MFs) and exchange-traded funds (ETFs).

ETFs vs Mutual Funds

Simply put, a Mutual Fund involves a pool of money from a group of investors with similar objectives and risk appetites being invested across a range of securities and assets. The investment pool is managed by a fund manager, who makes an assessment of the type of securities to put the money into. The investors can purchase the MF units, which generate returns in line with the performance of the underlying assets. Being professionals with in-depth knowledge of markets and different types of securities, fund houses and managers build a diversified portfolio with the aim of generating maximum returns for investors.

Broadly, MFs can be categorised into three types depending on the type of asset allocation: equity funds, debt funds and hybrid funds. As the name suggests, equity funds are those where a major portion of investment is into shares of various companies. Similarly, debt funds involve money put into a host of debt instruments like government bonds and securities, among others. And then there are hybrid funds, where investments are made across both debt and equity options.

Then there are exchange-traded funds that are similar to MFs in that both of these are investment options where money pooled in from investors is put into a basket of securities. An ETF basically copies an index, which means that it usually consists of stocks of different companies as present in the particular index. It tracks the performance of a particular index and can be traded on the stock exchanges.

Difference between ETF and Mutual Fund

The main difference between ETF and Mutual Fund is that while ETFs can be actively bought and sold on the exchanges, just like any other shares, one can only purchase a unit of a Mutual Fund from a fund house even though these can be listed on the exchanges. In the same way, ETFs generally do not have any minimum lock-in period and can be bought and sold by an investor at their convenience. However, a Mutual Fund unit usually involves some minimum lock-in, and selling the units before this period can also attract a penalty. Also, MFs are actively managed by fund manager or professionals, while ETFs are passive investment options that track the performance of an index.

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Know more about the difference in regular and direct plans in Mutual Funds here.

* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Investments are subject to changes in laws. Please contact your consultant for an exact calculation of your liabilities.