Financial Awareness Level
Exchange Traded Funds (ETFs) vs. Mutual Funds (MFs)
Mutual Fund, as an investment option, offers diversification and professional management, and are available in different categories based on the asset class, investment objective, and risk profile. ETFs also fall under the category of mutual funds. ETFs have some unique characteristics that set them apart from traditional mutual funds. For instance, they are passively managed like index funds, are listed on the exchange and traded like a share, and replicate the index. In this blog post, we will delve deeper into the similarities and differences between traditional mutual fund schemes and ETFs.
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Investment Style:
- Mutual Funds invest in a variety of assets such as equity, debt, gold or a combination of these.
- ETFs are portfolios of assets that replicate an index or a specified group of assets.
For example, a Nifty 50 ETF comprises shares of Nifty 50 Index companies in identical proportions.
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Purchase and Sale:
- Mutual Fund scheme units are bought and sold directly from the Fund through AMC and other authorized platforms.
- ETF units are typically bought and sold on a stock exchange.
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Pricing:
- Mutual Fund scheme units are priced at the Net Asset Value (NAV), which is calculated at the end of the day based on the closing market price of the underlying investments held in the Mutual Fund scheme.
- ETF units can be bought and sold on the exchange during market hours at prevailing market prices.
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Management Style:
- Mutual Funds are actively managed by a team of experienced professionals.
- ETFs are passively managed with limited human intervention.
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Performance:
- Most Mutual Funds (except index funds) seek to outperform a benchmark or index, i.e. give higher returns than the benchmark.
- ETFs seek to replicate the performance of the underlying portfolio.
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Fees:
- Actively managed Mutual Funds have higher fees compared to ETFs.
- ETFs are less expensive as they are less resource-intensive.
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Tax Saving Option:
- Non-index Mutual Funds offer a tax-saving option - Equity Linked Savings Scheme (ELSS).
- Currently, ETFs do not have this benefit.
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Risk:
- The risk in Mutual Funds is dependent on the Mutual Fund scheme's invested assets. Debt schemes carry less risk compared to equity schemes.
- The risk in ETFs is dependent on the risk of the underlying portfolio.
Conclusion:
Both Mutual Funds and ETFs offer investment options to generate returns. However, they differ in investment style, purchase and sale, pricing, performance, fees, tax-saving options, and risk. Investors can choose the option that best suits their investment goals and risk appetite.
Disclaimer: These pages seek to address basic level queries. This does not purport to be complete in all respects.
Table: Similarities / Differences between ETF and traditional Mutual Fund schemes
| Sr. No. |
Mutual Funds (MFs) | Exchange Traded Funds (ETFs) | ||
|---|---|---|---|---|
| 1 | Mutual Fund schemes generally invest money in equity, debt, gold, or a combination of these. | ETFs are portfolios of assets replicating an index or a specified group of assets. E.g., Units in a Nifty 50 Index ETF have Nifty 50 company shares as its underlying. Similarly, units in a Gold ETF are backed by investments in gold. | ||
| 2 | Mutual Fund scheme units are bought and sold directly through the AMC and other authorized websites. | ETF units are typically bought and sold on a stock exchange. | ||
| 3 | Mutual Fund scheme units are priced at the NAV; NAVs are generally calculated at end of the business day. | ETF units are to be bought and sold on the exchange during market hours at prevailing market prices. | ||
| 4 | Most Mutual Fund schemes are managed actively (exception: index funds / some fund of funds). | ETFs are managed passively. | ||
| 5 | Most Mutual Fund schemes (except index funds), seek to outperform a benchmark or index, i.e. give higher returns than the benchmark. | ETFs aim to replicate the performance of the underlying portfolio. | ||
| 6 | Charge a higher fee. | ETF fees are lower. | ||
| 7 | Non-index mutual funds offer a tax saving option – ELSS (Equity Linked Savings Scheme) | Currently, ETFs do not have this option. | ||
| 8 | Risk in Mutual Funds is dependent on the Mutual Fund scheme’s invested assets. For e.g. debt schemes carry less risk vis-à-vis equity schemes. | ETF risk is dependent on the risk of the underlying portfolio. For e.g., a Gold ETF mandate is to mimic gold returns. The risk for this Gold ETF is in failing to mimic the returns delivered by Gold. | ||
The information contained in this document is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
FAQ Section
What are Mutual Funds and Exchange Traded Funds?
Both Mutual Funds (MFs) and Exchange Traded Funds (ETFs) are investment options where money is invested to generate returns. MFs are offered by Asset Management Companies (AMCs) while ETFs are bought and sold on a stock exchange.
What is the difference between the investment style of Mutual Funds and ETFs?
MFs invest in a variety of assets such as equity, debt, gold or a combination of these. On the other hand, ETFs are portfolios of assets that replicate an index or a specified group of assets.
How are Mutual Funds and ETFs purchased and sold?
MF scheme units are bought and sold through the AMC and other authorized platforms. Meanwhile, ETF units are bought and sold on a stock exchange.
What are the differences in the management style of Mutual Funds and ETFs?
Most MFs are actively managed by a team of experienced professionals, while ETFs are passively managed using limited human intervention.
What are the differences in fees between Mutual Funds and ETFs?
MFs charge higher fees compared to ETFs, which are less expensive as they are less resource-intensive.
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Disclaimer
An Investor Education And Awareness Initiative Visit https://www.hdfcfund.com/information/key-know-how to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website (www.sebi.gov.in/intermediaries.html). For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints directly with the AMCs. if they are not satisfied with the resolutions given by AMCs, they may raise complaint through the SCORES portal on https://scores.gov.in. SCORES portal facilitates investors to lodge complaint online with SEBI and subsequently view its status. In case the investor is not satisfied with the resolution of the complaints raised directly with the AMCs or through the SCORES portal, they may file any complaint on the Smart ODR on https://smartodr.in/login.
