Mutual Funds and ETFs have always been topics of debate with confusion surrounding the better option. Well, this can be linked to the fact that both the type of investments let you invest in different securities such as equity, debt or commodities. If you are confused as to which is the best option for you, here is understanding the two concepts and the benefits that they carry:
ETF or Exchange Traded Fund
An ETF or Exchange Traded Fund is one that is managed through replicating an Index. This is done in terms of the investment as well as the performance for return. As part of an ETF, money is pooled out from different investors and the same is invested several different company equities.
- Exchange Traded Funds offer high liquidity. They are tradable securities and generally, larger ETFs have much higher liquidity in comparison with their smaller counterparts.
- These funds are passively managed, thus, an investor incurs lower management expenses. The passive management also makes them lesser prone to error problems that can occur due to error on part of the manager.
Mutual funds are a kind of investment that pools the money of investors and uses it for investment in various securities on their behalf. However, they are not traded on listed exchanges. Mutual funds are managed by professional investors to generate the best returns. As a result, an investor incurs the cost of fund management fee as charged by the professional manages.
- Mutual funds let you diversify you investments in multiple companies from different sectors. This factor essentially reduces the risk that is carried with direct equity investment.
- Regulated by the Security and Exchange Board of Indian (SEBI), the mutual funds industry comes with immense investment transparency.
- The funds are managed by experienced fund managers. Expertise and research on part of the investor reduces your need for being too invested in the process.
- Mutual funds are a liquid asset. They can be redeemed at any given point and are not traded on bourses.
The better investment option for you will depend on your financial needs. ETFs will bring better returns with lower risk. On the other hand, Mutual funds are more appropriate for anyone who can take moderate risk and wants to earn higher returns. It is also more suitable if you have long term investment goals.