Most people choose to invest in ETFs, which stand for Exchange Traded Funds, and mutual funds. Even if you don’t invest, you’ve probably heard of mutual funds and ETFs. Even though all investment options are meant to make money grow, they all work in different ways. And the investor needs to choose the right investment option based on the goal of the investment and how much risk they are willing to take. Even though ETFs and Mutual Funds are both popular ways to invest, it’s important to know the difference between the two before putting money into either of them.
Exchange-Traded Funds are funds that are traded on exchanges, as the name suggests. Stocks, commodities, and bonds are the things that ETFs hold. ETFs have index funds that are listed on stock exchanges and are managed passively. These index funds are made up of all the stocks or shares that have the same index value. You can buy or sell these things in real time, and the prices change throughout the day.
Mutual funds, on the other hand, are a group of investors’ money that is put into a variety of assets and securities. This money comes from different investors with the same investment goals and risk tolerance. The fund manager is in charge of making decisions about which securities to buy and how much to buy of each. The person in charge of the fund will be a skilled professional. Everyone who invests in mutual funds will get the same profit or loss.
Mutual Funds vs ETFs
| Mutual Funds | Exchange Traded Funds (ETFs) |
| Mutual Funds are actively managed funds by the fund manager | These are passively managed funds |
| Mutual Funds are controlled by your fund manager | ETFs can be managed purchased or sold freely by the investor |
| Can be traded only at the end of the day | An investor can manage it freely and trade at any time of the day based on the market conditions |
| The lock-in period for mutual funds is 9 days to 3 years | There is no lock-in period in the ETFs |
| Types of assets included in the mutual funds are stocks, gold, bonds, etc. | Types of assets included in the ETFs are stocks, gold, bonds, etc. |
| The expense fees on mutual funds are higher | The expense fees on ETFs are less |
| There is a minimum investment amount required to fit into a portfolio for mutual funds | There is no minimum investment amount specified |
| There is a brokerage commission charged | There can be no brokerage commission required |
| Provides an investment diversification option | Even ETFs offer an investment diversification option |
| The transaction costs are zero or lower while buying or selling the mutual funds | There are certain transaction costs levied while buying or selling ETFs |
Mutual Funds vs Exchange Traded Funds – Which is recommended?
ETFs and Mutual Funds both offer diversified portfolios of investments, which makes them less risky for investors. But you shouldn’t choose an investment option until you’ve thought about a few things, like your goal, your risk tolerance, how you’ll sell the asset, and how long you’ll be investing. When you take all of these things into account, you can choose the best investment option. Even though ETFs are more flexible and have better returns in the short term than mutual funds, which are invested for a set amount of time, there is no way to recommend one over the other because each has its own benefits that depend on the investor’s needs.