Exchange Traded Funds commonly known as ETFs are financial instruments which pool a bundle of securities to serve a specific goal.
In a slightly similar way, mutual fund schemes collect money from investors to give units and invest the same in different securities depending on the risk and return.
ETF's can be bought or sold just like stocks through stock exchanges anywhere across the country.
While, mutual funds do not see price variation during trading hours as the Net Asset Value (NAV) is set at the end of each trading day.
This gives an added advantage to ETF over traditional funds.
Rate of Return
Most of the ETFs track a particular index and are considered to have lower expenses than actively managed mutual funds. However, when investing in an ETF, an investor needs to pay commission to the broker.
Investment in ETFs works out to be cheaper when compared with traditional mutual funds or index funds in terms of fees and other expenses.
ETFs do not attract any sales load or there are no minimum investment, where as traditional mutual funds, may have both.
ETFs does not attract Taxation
ETFs are considered more tax efficient when compared to mutual funds. Click to know more on ETF taxation.
Here is a quick comparison of ETF and Mutual funds(open-ended mutual funds).
|Trading||Trade during trading day||Trades at closing NAV|
|Expenses||Operating expenses are low||Operating expenses are high|
|Investments||No minimum investments||Usually have investment minimums|
|Taxation||Tax-efficient||Less tax-efficient compared to ETF|
|Sales Load||Not applicable||Can have sales load|
|Liquidity Provider||Fund itself||Stock Market or Fund itself|
Should You Invest in ETFs or Mutual Funds?
Objectives of both these investment avenues are different. In terms of ETFs in India, gold ETFs are rather popular as compared to other forms of ETFs.
These days mutual funds have attracted a lot of interest and we are seeing record inflows by retail investors into the mutual fund industry.
Having said that we wish to emphasize that since the objectives of both these investment tools are different, each investors could, choose according to his needs.