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MUTUAL FUNDS VS. ETFs: WHICH ONE IS RIGHT FOR YOU?
One of the most effective ways to grow your finances is by making your money work. This is the reason why people invest in mutual funds and exchange-traded funds (ETFs). However, many people often can’t distinguish between the two, especially new investors. They are constantly caught up in the mutual funds vs ETFs debate, unable to pick one over the other. With both carrying certain benefits and risks, it’s important to properly know what you are investing in before you make a decision. Let’s take a deeper look.
Mutual funds are investments that a company does for you. These are professionally managed schemes wherein a company collects funds from various investors and invests the sum in diverse holdings for maximum profit. Companies invest this amount in bonds, stocks, debt instruments, and more. This is considered beneficial over directly investing in stocks because mutual fund investments are managed by professionals. Every individual investor might not know everything about investment or have the time and resources to understand and analyze this medium of investment. Companies, on the other hand, have expert fund managers who do this on behalf of the investors and company. Mutual funds carry more risks than stocks but they are also more beneficial. Each mutual fund investment has a Net Asset Value (NAV) which can be ascertained by dividing the total sum for investment by the number of investors.
Exchange-Traded Funds (ETFs)
Unlike mutual funds, ETFs are not professionally managed. Instead, an ETF is passively managed since it is a replicated index. ETF only tracks the funds of the index. Since ETFs are held by an underlying index, all stocks hold the same value. This makes it possible for investors to actively trade in ETFs. They can also be freely bought and sold throughout the trading session.
ETFs vs Mutual Funds
The final decision that every investor has to make is whether they should invest in an ETF or a mutual fund. These products look similar but have significant differences between them. Enlisting them here:
Flexibility - ETFs can be bought and sold freely in the market at the investor’s convenience. Since it is only an index, its prices are available in real-time. However, investment in a mutual fund can only be done on request. The NAV indicates the price of a unit of the mutual fund. It’s the company/fund manager that manages the investments.
Expenses and Fees - ETFs do not need active management since these are only replication of an index. Consequently, the fees and expenses for ETFs investments are low. In mutual funds, the fund manager actively manages the investments. As a result, the fees and expenses of a mutual fund are higher.
Commission - ETFs are traded freely like shares on every stock exchange. An investor has to pay the usual commission they pay in exchange for the trade. In comparison, mutual funds do not have any commission attached with them whether you are purchasing or selling a unit.
Management - Mutual funds have dedicated fund managers that actively manage them. These are professional managers who take decisions on behalf of the investors for maximum profit from the investment. In ETFs, only the index is tracked.
Lock-In Period - Since ETFs are purchased and sold freely, they do not have any lock-in period. You can buy or sell them at your inconvenience. Mutual funds, on the other hand, do have a lock-in period. However, this depends entirely on the goal of the fund. Some mutual funds have a lock-in period as short as 9 days and then there are others that have a lock-in period for as long as 3 years. You have to know this in advance before you invest.
Final Verdict: Which is the best for you?
The next thing you have to decide is which of these two is the best for you. There is no objective answer to this. The right choice depends on what kind of investment you want to have. When you are evaluating between mutual funds and ETFs, consider these factors:
Ease of fund liquidation
Your financial goal
Your tax-saving strategy
Once you have considered these factors, you will have the answer to whether you should invest in mutual funds or ETFs. At Muthoot Finance, we have investment experts who can understand your financial goals and devise an investment strategy to achieve the same. Visit your nearest Muthoot Finance branch to know more.
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