ETF v/s. Mutual Funds – The Battle of Heavy weights

In recent times ETF has gain a lot of attention as an investment avenue and is giving a good competition to Mutual Funds. Exchange Traded Funds have been one of the cost effective means of investment worldwide and the impact is slowly being seen in India. But not Mutual funds has been the main medium of investment for many investors due to which the question arises that should one invest in Mutual Funds or ETFs.

One can get the answer to this question by understanding similarities and difference between ETF and Mutual Fund -

Similarities Between ETF and Mutual fund:

• Diversification: ETF and Mutual funds provides benefit of diversification as both invest in different stocks, sectors, bonds, commodity etc. 
• Professionally Managed: Both ETF and Mutual funds are managed by professionals. However some ETF’s are passively managed.

Difference Between ETF and Mutual fund:

• Trading and pricing: ETF are traded much like stocks since they are listed on the stock exchange also the price of ETF’s keeps on fluctuating just like stocks. Whereas Mutual funds are priced once a day after market close. 
•  Professional management: There are two kinds of ETF one which is actively managed by the professionals and another which is passively managed. Passively managed ETF do not aims to beat the benchmark index. Contrary to this most of the Mutual funds in India are actively managed by the professionals.
• Expenses: ETF’s are less expensive than mutual funds this is because ETF do not have exit load and operating expenses are also less when compared to mutual fund. 
• Tax Efficient: When compared to Mutual fund, ETF are considered to be more tax efficient. This is because ETF are traded on the stock exchange and you buy and sell ETF’s and not the underlying securities.

One can decide their suitable investment avenue according to the investment objective. However investment in both Mutual fund and ETF will be a good option as both have the capability to provide better returns to their investors.

ETFs are a useful and different source of investment. If they are clubbed with Mutual Fund benefits, they can definitely create wonders in your portfolio.

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