While both ETF and mutual funds are almost similar, the way one can invest in them is different. Also, with mutual fund investments, the fund manager controls the investments, while in an ETF, the investor has to decide where their funds go.
While there are various kinds of investment tools available in the market, investment in ETFs is something that we come across often. In many aspects, Exchange Traded Funds (ETF) are quite similar to mutual funds, nonetheless, also quite different.
Both ETFs and mutual funds are types of pooled funds. Investors contribute their money and create a corpus, which is then re-invested in assets and securities. Having said that, there is a major difference between these two securities in the way they are traded and so is their tax treatment.
Here is how these two products fundamentally differ;
The first major difference between both these investment tools is the way they are traded and settled. For instance, mutual funds are traded at the NAV (net asset value) calculated at the end of the day, whereas ETFs being more liquid can be bought and sold at their current market price, similar to intraday trading. Industry experts say it can be ideal for investors that continuously track the market as they will be able to book quick profits due to price fluctuations.
While both ETF and mutual funds are almost similar, the way one can invest in them is different. For instance, ETF can be purchased directly from the open market without the need for an intermediary. However, in the case of mutual funds, an investor cannot purchase them directly. The need you have to follow a process, fill up forms etc. Experts say even though it is a very simple process, it is still time-consuming as compared to ETFs. Having said that, with mutual fund investments, the fund manager controls the investments, while in an ETF, the investor has to decide where their funds go.
Even though it is considered one of the best investment tools, experts say one of the drawbacks of MF investments is the mandatory lock-in period. Depending on the type of fund the lock-in period ranges from being anywhere between 3 months – 3 years, wherein an investor cannot sell or redeem his/her mutual fund during this time. Selling or redeeming is either prohibited or subject to penal charges during the lock-in period. ETF on the other hand has no such lock-in period attached to it. Hence, an investor can redeem or sell their ETFs any time they please at the prevailing market price. Therefore, ETF is considered more liquid.
Also, ETFs charge between 0.05 per cent to 1 per cent of the net asset value as expense ratio, which is much lower as compared to mutual funds. Additionally, on the tax front, due to both MF and ETFs varied purchase and redemption criteria, both their tax treatment is quite different.
Industry experts say, both ETFs and MF come with their own set of pros and cons, therefore, an investor should properly understand these financial instruments before investing in them.