Confused between mutual funds and ETFs? Read this post to understand the major differences between the two and what you should select.

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Mutual funds have become the go-to investment option in India. With so many fund categories, there are schemes for every investor, risk appetite, and financial objectives. But like mutual funds, Exchange Traded Funds (ETFs) are growing in popularity too.

If you’re building an investment portfolio, what should you choose between mutual funds and ETFs? Take a look at what they mean and know the major difference between mutual fund VS ETF -

What are Mutual Funds?

A mutual fund is a professionally-managed pooled investment vehicle. A mutual fund scheme pools investment through the sale of mutual fund units to investors and invests in securities based on its category and objectives. You can find mutual fund schemes that invest in stocks, government and corporate bonds, money market instruments, gold, real estate, and more.
Asset Management Companies (AMCs) offer and manage mutual fund schemes. Every scheme has a fund manager responsible for investing and managing the pooled investment. Investors can make a lump sum investment or start an SIP (Systematic Investment Plan) in any mutual fund scheme.

What are ETFs?

ETFs or Exchange Traded Funds are passive investment vehicles that track indexes, bonds, commodities, or a basket of assets similar to index mutual funds. For instance, you can find ETFs with BSE Sensex or NSE Nifty as their underlying index. By purchasing units of these ETFs, you’re purchasing units of a portfolio tracking the returns and yields of the underlying index.

Unlike mutual funds, ETFs are traded on stock exchanges. Like stocks, ETF prices change throughout the market hours depending on the demand and supply. While investors generally make lump sum investments in ETFs, some stock brokers offer ETF SIP facilities.

Also Check - What are Index Funds?

What is the Difference Between ETF and a Mutual Fund?

Which One to Choose, ETF or Mutual Funds?

Here,
Once you understand the difference between ETF and mutual fund, the selection shouldn’t be difficult. Here are the factors you should consider before investing-

• Risk Appetite

  While ETFs generally have lower potential risks, mutual funds vary in terms of risk depending on their asset allocation and investment strategy.

• Investment Expertise

  With mutual funds, you get access to professional management. You can relatively stay invested for a longer duration without making investment decisions as there’s a fund manager responsible for building and managing the portfolio. With ETFs, you make investment decisions, like entry and exit, yourself.

• Returns Expectation

  Actively managed mutual funds constantly strive to beat the benchmark and potentially aim to generate higher returns. However, ETFs only mimic the index and aim to deliver similar returns.

• Tax Saving Strategy

  If you’re looking for tax-saving investments, mutual funds like ELSS can be a good choice as they’re eligible for deductions of up to Rs. 1.5 lakhs in a financial year under Section 80C of the IT Act.

Investing in Mutual Funds and ETFs

Both mutual funds and ETFs have their advantages. You can select one based on the above points or even consider investing in both to build a well-diversified portfolio.

If you’re unable to decide between ETF or a mutual fund, you can also consult a professional investment advisor who can recommend the right investment based on your risk appetite, time horizon, and investment objectives.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.