ETF vs Mutual Funds
Mutual Funds are often compared with Exchanged Traded Funds (ETF) as they both offer packages to manage investors’ money. Both are professionally managed for the sole benefit of the investors who owns them. This article will help you understand the similarities and differences between ETF vs. Mutual Fund.
Exchange Traded Funds vs Mutual Funds
Both ETF and mutual funds are investment packages. You own a tiny portion of the basket, consisting of a set (portfolio) of assets, when you own shares in them. They operate differently, though, and you spend differently in them.
Mutual funds are distinctive as they are open-ended. They do not have a set amount of shares and they do not trade their stocks on exchanges. When investors purchase stocks, the cash will be transferred into the fund and added to the mutual fund's asset pool. The individual investor is awarded new stocks, and the pool of resources in the fund becomes bigger.
The transaction involving the redemption or selling of stocks takes place through the mutual fund company. The assets are drawn from the asset pool to pay the person who exchanges his shares in money. These stocks do not then occur again, and the asset pool is diminished.
Current funds belong to a family of mutual funds and give countless characteristics to investors. You can, for instance, move from one fund to another in the family, or buy stocks on a monthly schedule. But if you want to purchase or sell stocks and you need a swift transaction... you're not meant to.
ETFs are basically index funds as they track the performance of an index. However, similar to the stocks, they are also traded on major exchanges. For example, LIC MF ETF - CNX Nifty 50 track the Nifty 50 index. Some mutual funds are also index funds such as LIC MF Index Fund - Nifty Plan that tracks the Nifty 50 index.
ETF investing vs Mutual Funds - What is the Difference
The main difference is that ETFs are not open-ended. The number of stocks in ETF remain fixed. The corporation (or the fund) has its money to operate or to manage in the case of an ETF once shares are initially sold during an IPO. Thereafter, the trading of these stocks begin in the market.
To keep it simple, when you invest or trade in ETF, you simply deal in the existing stocks that are already being traded in the market. These transactions can take place throughout the day with the help of broker or distributing firm.
While some ETFs track major market indexes, there are those which track industries or sectors. So if you want to invest in banking, oil, commodities, gold, real estate, or bonds, there are ETFs that track the performance of the stocks in these sectors. Hence, ETFs have gain popularity among active investors.
ETF or Mutual Fund - Which one to choose
If you are planning to invest for long term and want to avail flexibility in your investment portfolio, you are advised to invest in mutual funds. If you are planning to play with the market volatility and need instant liquidity, then investing in ETF is a better fit for you.