For many beginners, ETFs (Exchange-Traded Funds) and mutual funds seem almost the same. Both pool money from investors to buy a collection of stocks or bonds. But there are key differences every investor should understand.
What Are Mutual Funds?
A mutual fund collects money from investors and is managed by a fund manager. The manager decides which stocks or bonds to buy.
- Pricing: The price (NAV) is calculated once daily after the market closes.
- Accessibility: You buy/sell directly from the fund company.
- Management: Often actively managed, aiming to beat the market.
What Are ETFs?
An ETF also pools investments but trades like a stock on an exchange.
- Pricing: Prices fluctuate throughout the day, just like regular stocks.
- Accessibility: You can buy/sell instantly via a brokerage.
- Management: Many ETFs are passively managed, tracking an index like Nifty 50 or S&P 500.
Key Differences
- Liquidity: ETFs are more liquid—you can sell anytime during market hours.
- Cost: ETFs usually have lower expense ratios than actively managed mutual funds.
- Minimum Investment: Mutual funds may require a minimum, while ETFs allow you to buy even one share.
- Tax Efficiency: ETFs are more tax-efficient due to their unique structure.
Which Should You Choose?
- ETFs: Great for beginners who want flexibility, low fees, and index tracking.
- Mutual Funds: Suitable for those preferring professional management and SIP (Systematic Investment Plan) convenience.
Conclusion:
Both ETFs and mutual funds diversify your portfolio. The choice depends on your style—hands-off with SIPs or more active with ETFs.