In the world of investment today, two options are most discussed. ETFs and mutual funds. The objective of both is the same, that is, to collect people’s money and invest it in the stock market or other assets and give good returns in the long run. But the method of investment, convenience and expenses are different in all these matters. In such a situation, the question arises that which option is better for the common investor?
ETFs i.e. exchange traded funds are bought and sold on stock exchanges like shares. For this you must have a demat and trading account. You can buy or sell them anytime when the market is open and their price keeps changing throughout the day. Whereas, mutual funds are purchased directly from the fund house and their buying and selling is done at the NAV decided at the end of the day. Here there is no option to react immediately to market fluctuations, which sometimes saves the investor from haste.
Where does your money go in ETFs?
Talking about strategy, ETFs usually follow an index like Nifty 50. That is, they hold shares in the same proportion as in the index. This is called passive investing. On the other hand, many mutual funds are run in an active manner, where fund managers select stocks based on their experience. If their choice is right, they can get higher returns, but it also involves dependence on the manager and risk. SIP i.e. Systematic Investment Plan has made mutual funds very popular in India. Every month the fixed amount is automatically invested, which maintains discipline. Such auto facility is generally not available in ETFs, hence mutual funds are considered easier for regular investments.
ETFs are often cheaper in terms of expenses. Their expense ratio is low, which gives you higher returns in the long run. However, ETFs may also have hidden costs like brokerage and bid-ask spreads. Whereas active mutual funds have slightly higher expenses, but in return they get the possibility of better performance. Ultimately remember, the real difference is your goals and risk appetite rather than ETFs or mutual funds. If you want low costs and market-like returns, ETFs may be a good fit. But if you want regular investment, easy process and professional management then mutual funds can be a better option.
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