What is a Mutual Fund and ETF?
Mutual Fund and Exchange-Traded Fund
In the 21st century world has gone to another level. India's economic growth is tremendous. As the Indian economy grows people can find various investment opportunities. Mutual funds and Exchange-traded funds are the one of the popular investment instrument in India.
In the previous article, we have given information on the history of India, and what is mutual fund. In this article, we are going to see detailed information about ETFs, How ETFs are correlated with mutual funds, and a comparison of Mutual Funds and ETFs.
What is ETF:
Its name defines something traded on an exchange. It is a type of investment fund that is traded on stock much like a stock. ETFs hold a variety of assets, such as stocks, bonds, or commodities, and usually track a specific index, sector, or asset class. For example, the Nifty BeES ETF tracks the Nifty 50 Index, which includes 50 of India's largest companies. This means that when you invest in the Nifty BeES ETF, you are investing in all the companies in the Nifty 50, such as Reliance Industries, TCS, and HDFC Bank.
How ETF is different from mutual fund:
Trading style:
ETF (Exchange-Traded Fund): Traded on stock exchanges like individual stocks. You can buy or sell an ETF throughout the trading day.
Mutual Fund: Not traded during the day. Mutual Funds are bought or sold only at the end of the trading day, based on the Net Asset Value (NAV) of the fund.
Management Style:
ETF: Mostly passively managed, which means you can manage your ETF.
Mutual Fund: Can be actively or passively managed. This means the fund manager is responsible for your investment.
Costs:
ETFs: Typically have lower expense ratios because they are passively managed. There may also be trading commissions when buying or selling, depending on the broker.
Mutual Fund: Actively managed funds generally have higher fees due to the cost of professional management. There may also be additional charges, such as entry or exit loads.
Liquidity:
ETF: Highly liquid, as you can buy or sell shares during market hours at real-time prices.
Mutual Fund: Less liquid, as you can only buy or sell shares at the end of the day based on the NAV.
Minimum Investment:
ETF: No minimum investment requirement, but you must buy at least one share.
Mutual Fund: Often has a minimum investment requirement, which can range from ₹500 to ₹5,000 or more, depending on the fund.
Types of ETFs In India:
- Equity ETF:
- Commodity ETF
- Gold ETF
- Bond ETF
- Index ETF
- Sector ETF
- Currency ETF
- Thematic ETF
- International ETF
- Debt ETF etc.
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Similarities between Mutual funds and ETF:
Diversification:
In a mutual fund, fund managers diversify portfolios in different sectors or companies and in an ETF we can invest in different stocks of a particular ETF.
Exposure to Multiple Asset Classes:
Both Instruments offer exposure to different assets. Like equity, debt, securities etc.
No Need for Individual Stock Picking:
In both the instruments, Mutual Funds and ETFs there is no need to buy or focus on single stock. The fund managers manage money in the case of actively managed mutual funds, and in the case of passively managed funds, the role of the fund manager is much less. This is ideal for investors who do not want to manage individual securities but still want broad market exposure.
Long-term investment instrument:
Both the instrument mutual funds and ETFs are best for suitable who want to build capital over time.
Risk Mitigation:
Both instruments allow investors to diversify their portfolios Diversification of the portfolio helps to mitigate the risk.
Conclusion:
Both instruments are famous for investing in India and the remaining world also. Based on investing style, risk management, knowledge etc. Mutual funds and ETFs are different for everyone. If you want professional management and don’t mind paying a bit more, mutual funds could be a good choice and vice versa if you are flexible in trading and watching the market then ETF will best option.
FAQ:
1.How to invest in a mutual fund?
Ans: To invest in mutual funds in India, you need to open a Demat and Trading Account with a broker. Then, you can invest online or through financial institutions by selecting mutual funds based on your investment goals.
2.How to buy ETFs in India?
Ans: To buy ETFs in India, you need to open a Demat and Trading Account with a broker. After that, you can buy ETFs on stock exchanges like NSE or BSE by placing an order, similar to buying shares of a company.
3.Are Mutual Funds Safe?
Ans: Mutual funds are relatively safe, but they carry some risk because they invest in various assets like stocks, bonds, or other securities that may be volatile. The level of risk depends on the type of mutual fund (equity, debt, hybrid, etc.). Diversifying across different funds can help reduce risk.
4.Are ETFs Taxable?
Ans: yes ETFs are taxable. Capital gain tax on profit and other taxes are applied to ETF.
5.Can ETF become zero?
Ans: Yes, ETF can be zero, if the entire ETF Index loses its whole value, then the ETF can be zero.
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