Difference between ETFs and Mutual Funds

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An exchange traded fund (ETF) is one type of security that tracks sector, index, commodity, or any assets; It can be purchased or sold on a stock exchange just like a regular stock. ETFs may contain many types of investments- stocks, bonds, commodities, or even a mixture of investment types. You can structure an ETF to track anything - like the price of an individual commodity, specific investment strategies or even a large, diverse collection of securities and so on. In simple words, an exchange traded fund (ETF) can be visualized as a basket of securities that is traded on an exchange, similar to a stock.

Mutual Fund, on the other hand, is a professionally managed portfolio of stocks and bonds. In the case of Mutual funds, the companies collect money from thousands of investors and invest in well-researched stocks/bonds. Mutual funds are short-cuts for small or individual investors to access professionally managed portfolios of equities, bonds and securities. In the case of Mutual funds, each shareholder participates in the gains or losses of the fund. The performance of Mutual funds is usually tracked as per the changes in the total market cap of the fund.

Usually, investors face a bewildering array of options- to choose between stocks or bonds, domestic or international- based on value or growth and on different sectors and industries. Above and beyond all, deciding whether to buy an exchange traded fund (ETF) or Mutual fund seems like a significant consideration next to all the others. There are key differences between the two types of funds which may affect how much money you make and how you make it.

A few similarities between Mutual funds and ETFs are given below:

  • They both should strictly adhere to the same regulations concerning what they can own and how much concentration to be held in one or a few holdings
  • Both hold portfolios of stocks, bonds and occasionally precious metals or commodities
  • In case of the amount of money, they can borrow in relation to the portfolio size, both mutual funds and ETFs follow the same regulations.
  • Both consist of a mix of various different assets and both represent a common way for investors to diversify.

But, in order to understand whether Mutual Fund or ETF fits your requirement in a better way, it is impertinent to analyse the key differences between both.

  • ETFs are traded like stocks on an everyday basis while to invest in Mutual funds one has to wait for NAV calculation, which is generally declared at the end of the day based on price fluctuations of stock portfolio.
  • Mutual funds are usually managed at an active pace. A fund manager makes decisions about how to allocate assets in the fund in the case of Mutual Funds. ETFs are usually passively managed and based more on a particular market index.
  • The lowest cost ETFs usually have lower expense ratios than the lowest cost index mutual funds.