Some of the crucial tasks to take care of is protecting your financial future. There are endless options available to make sure that your money generates better returns as per your financial needs and goals. Out of many other options available in India, direct mutual funds and ETFs are the popular ones. Although, they look quite similar at first, but when analyzed carefully, there are some differences between the two. Let’s figure it out, here:
What are ETFs?
It is strongly believed that Indians have a strong affinity towards gold for centuries now. Not to miss, the country’s first–ever Gold ETF was started in the year 2007, which thereby set the trend. Precisely, it’s an underlying asset is GOLD. Therefore, gold ETFs give you enough exposure to the Indian gold market. Let’s figure out more about this here:
Gold Exchange Traded Funds or ETFs combine the feature of gold investments and stock trade. Also, they are based on the price of gold & investments are made in ‘gold bullion’. The transactions of gold ETF are made through stock-brokers who eventually will use your money to invest. They buy gold at market rates. One gold ETF unit is equal to 1-gram gold at the purchased price. At most, these units are bought & sold on the cash market of the stock exchange just like company stock. There is no such difference.
What is a Mutual Fund?
A mutual fund is an investment product that pools money from people and later invests it in a vast variety of bonds, stocks, and other investments. All–together, they are managed by ‘Fund Managers’, who are experts at managing investments and money.
- Money pooled from different investors
- Managed professionally
- Well-regulated by SEBI
- Allowing to invest in small amounts
- High returns as compared to conventional investing
- Access to large portfolios
ETFs VS Mutual Funds
The decision between an ETF and mutual fund is one of the major conundrums for an investor whilst taking an investment decision. The difference between ETF and Mutual Fund, here:
- Flexibility: ETFs are freely-traded in the market; It can be bought & sold as per the convenience of the investor. Their market price is available in real-time like any ordinary equity shares; whereas, units of mutual funds can be bought/sold by placing a request with the fund house.
- Expenses & Fees: ETFs replicate the overall performance of an index, therefore, they don’t need active management, so, expenses and fees are low. Whilst in mutual funds, the fund manager takes investment decision on behalf of the investor, thus, expenses are higher.
- Commissions: ETFs are traded just like other shares on the exchange, investors need to pay commission on sale/purchase units as per the rules; whilst, in mutual funds, there is no need to pay any sort of commission/fees/charges for the sale & purchase which are known as direct mutual funds.
- Management: ETFs, the funds merely track the market index, however, there are some ETFs that are managed actively, but they have a high expense ratio. In mutual funds, the management of the fund is perfectly done by the fund manager who take the investment decisions on behalf of the investor.
Deciding between ETF and Mutual Funds
Taking care of the following factors, here:
- Your risk-appetite
- The liquidity of the investment
- Your financial goals
- Your investment horizon
- The tax-saving strategy you are having