The way a mutual fund is managed speaks volumes about how the if will perform at the stock exchange. For those who aren’t aware, mutual funds are a pool of professionally managed funds that invest across asset classes and money market instruments for income generation. Mutual fund managers are responsible for the sale / purchase of securities through an applied investment strategy with the aim of helping the scheme achieve its investment objective. Depending on the nature of the scheme, its risk profile and asset allocation strategy, a mutual funds may invest across various asserts and money market instruments like equity, debt, government bonds, corporate securities, commercial papers, company fixed deposits, call money etc.
Mutual funds can be largely categorized as actively managed funds and passively managed funds. Actively managed funds are those funds that involve the active participation of the fund manager. On the other hand, passively managed funds do not involve active participation of the fund manager.
Exchange Traded Funds or ETFs as they are largely referred to as, are passively managed funds which can be traded at the stock exchange like any other company stock. Exchange traded funds aim at generating capital appreciation over the long term by tracking the performance of its underlying index / benchmark with minimum tracking error.
Similarities between exchange traded funds and other mutual fund schemes
Both ETFs and mutual funds aim at generating capital appreciation over the long term by investing in various assets, stocks, and bonds. ETFs are also mutual fund schemes, but they follow a slightly different asset allocation and income generation strategy. You can start a monthly SIP in both ETFs and mutual funds. A Systematic Investment Plan is a tool that has made investing easy for mutual fund investors. One can now invest fixed amount at regular intervals in any mutual fund scheme or ETF of their choice. A new investor can also refer to SIP calculator, a free online tool easily accessible to everyone.
Difference between ETFs and other mutual fund schemes
| Mutual Funds | Exchange Traded Funds |
| Mutual funds are not traded by investors on a day to day basis | ETFs are traded at the stock exchange when the markets are open and its value keeps fluctuating during the course of trading |
| Mutual funds have recurring costs making their expense ratio higher | Since ETFs do not involve active participation of the fund manager, their expense ratio is low |
| Mutual funds generally have a minimum investment amount for SIP or lump sum investing | There is no such minimum investment amount when it comes to investing in exchange traded funds |
| Mutual fund investors do not need a demat account or a trading account to purchase mutual fund units | One cannot trade with exchange traded funds unless they have a demat and a trading account |
| Mutual fund units are brought from the fund house / AMC / third party aggregator based on the fund’s existing NAV (net asset value) | Exchange traded funds can be bought or sold in the prevailing markets at a rate that keeps fluctuating |
| There is no entry load for most mutual fund scheme investments | Transaction costs might involved in the buying / selling of exchange traded funds |
Both mutual funds and ETFs are market linked schemes which means they do not guarantee capital appreciation. Hence it is essential for investors to first determine their risk appetite before making an investment decision. Those who are new to investing or financial planning in general, they should consult a financial advisor who might help them make an informed investment decision.
