ETFs vs Mutual Funds

Hey there, My Money Box Community! 👋

Today, let us dive into the world of Exchange Traded Funds (ETFs) and Mutual Funds. They may seem like twins in the investment world, but they have their unique quirks. Let us break it down:

🔹Similarities🔹
𝐒𝐭𝐫𝐮𝐜𝐭𝐮𝐫𝐞: Both are managed “pools” of individual securities like shares or bonds.
𝐄𝐱𝐩𝐨𝐬𝐮𝐫𝐞: They offer exposure to a wide variety of asset classes and markets, providing more diversification than a single share or bond.
𝐌𝐚𝐧𝐚𝐠𝐞𝐦𝐞𝐧𝐭 & 𝐂𝐨𝐦𝐩𝐥𝐢𝐚𝐧𝐜𝐞: Both are professionally managed and monitored by regulatory bodies (like SEBI in India).

🔸Differences🔸
𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐒𝐭𝐫𝐚𝐭𝐞𝐠𝐲: Most ETFs are passively managed, benchmarked to an index. Mutual funds, however, can be both active and indexed, but most are actively managed.
𝐓𝐫𝐚𝐝𝐢𝐧𝐠: Mutual funds sale purchases are executed once at the end of the day, with all investors receiving the same price (NAV) at the end of the day. ETFs also have end of day NAV however ETFs trade like shares on a stock exchange, with price changes throughout the day and hence individual investors might get different market price for their units.
𝐃𝐞𝐦𝐚𝐭 𝐀𝐜𝐜𝐨𝐮𝐧𝐭: Mutual Funds are held as a Statement of Account with the AMC and hence no Demat account is needed. However, ETFs are purchased as “shares” on the stock exchange – as Demat account is needed.
𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐌𝐢𝐧𝐢𝐦𝐮𝐦: ETFs do not require a minimum investment – you can buy an ETF for the price of just one share. Mutual Funds have a minimum initial investment unrelated to the NAV of the scheme. It is possible to purchase fractional units in Mutual Funds.
𝐂𝐨𝐬𝐭𝐬: ETFs have implicit and explicit costs. While trading on the stock exchange – there will be brokerage commissions and the ETF provider will have an expense ratio. These are the explicit costs however there are implicit costs are – bid/ask spread, premium/discount to NAV, Tracking error and Market Impact costs. Mutual funds can be purchased without brokerage, but in addition to expense ratio they may carry other fees like early redemption fees.
𝐋𝐨𝐜𝐤-𝐈𝐧𝐬: ETFs do not have a lock-in period, but some Mutual Funds do (e.g., ELSS – 3 years), and selling units before this period can attract a penalty.

Hope this sheds some light on the ETFs vs Mutual Funds debate. Remember, knowledge is power in the world of finance. Happy learning!