MFs vs ETFs what should you invest in?
Exchange Traded Funds (ETFs) have been catching investors’ fancy of late. But what’s the difference between mutual funds and ETFs? In this article, we’ll help demystify ETFs for you by shedding light on the similarities and differences between Exchange Traded Funds and Mutual Funds.
Read this article to know whether you should invest in ETFs, Mutual Funds, or both.
Mutual funds Vs ETFs
|Management style||While in theory ETFs can be actively or passively managed, in practice, they are mostly passively managed funds. Moreover, they can never be close-ended||Mutual funds can be actively or passively managed. But investors predominantly invest in actively managed mutual fund schemes. Mutual funds can be open-ended as well as close-ended|
|Methods of investing||Just like you buy and sell stocks, you can buy and sell units of ETFs. Including margin funding (although it’s not advisable to do so)||Mutual funds can be invested in or redeemed at their net asset value which is updated every day. You can’t use margin funding to buy mutual fund units.|
|Role in the portfolio||Since they are mostly passive and traded in real time, ETFs can be a part of your overall trading/hedging strategy. Generating benchmark-beating returns isn’t really the objective here||Mutual funds are meant for more conventional investors who want to take advantage of active professional management to generate market-beating returns|
|Costs||ETFs, largely being passively managed, have low expense ratios||Active fund management typically results in a higher expense ratio. As long as your investments beat the market returns, you need not bother about the higher cost structure of active mutual funds|
Also read: What are the different types of mutual funds in India?
Similarities between ETFs and mutual funds are:
ETFs and Mutual Funds pool money from investors and invest in a standard portfolio, serving a common investment objective.
Both, ETFs and Mutual Funds offer you diversification across asset classes or within an asset class, or both. ETFs and mutual fund schemes can invest in equities as well as debt and gold (or any other standard asset class). And you can also have mutual fund schemes and ETFs targeting a specific sector or a theme, say infrastructure or technology amongst others.
ETFs and mutual funds relieve investors from the responsibility of being attentive to their investments 24×7. So, when you invest in ETFs or mutual funds, you can focus on your core work and leave money management to professionals.
Mutual funds vs ETFs: what works for you?
ETFs and Mutual Funds don’t compete with each other, as far as their role in your portfolio is concerned. In fact, they complement each other. For instance, if you want to invest in a fund that closely tracks the returns of an index, say, Nifty 50, you can invest in an Exchange Traded Fund replicating the Nifty 50 index. On top of that, you can invest in a handful of actively managed equity schemes to generate superior returns.
Also read: Fixed Deposits vs. Mutual Funds which is better?
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