KNOWLEDGE CENTRE Mutual Funds Comparison / What Is The Difference Between ETFs And Mutual Funds?

What Is The Difference Between ETFs And Mutual Funds?

Before choosing the right fund for yourself, you need to know what exactly your financial goals are in investing. What kind of risks are you capable of handling? What asset classes do you want to be exposed to? It’s easier to select an investment tool when you already have parameters set up. Once you know your investment needs, you’ll be able to properly decide which amongst ETF and Mutual funds is right for you.

What are the differences between ETF and Mutual Funds?

Following are the characteristics that differs for ETF and Mutual funds:

  1. The process of trading
  2. Operational expenses
  3. Tax implications
  • The process of trading: Great versatility is offered by ETFs. The idea is that an investor can buy or sell his Exchange Traded Funds at any time of the trading day. However, in the case of traditional mutual funds, the investor has to wait until the end of the trading day to do the transaction. Also, in the case of mutual funds, this transaction can only take place once in one trading day, however, in the case of Exchange Traded Funds; the investors enjoy the capability of doing transaction as per their wish during a trading day. Transaction in mutual funds is limited to happen at the end of the day as it is then that the Net Asset Value of the mutual funds is determined. In the case of ETF, the transactions are short and can be multiple in a day. This is because they are continuously valued in the market.
  • Operational Expenses: Internal or operation costs of most of the Exchange Traded Funds are considerably low if we compare them with the operating costs incurred on mutual funds.
  • Tax Implications: Investors get attractive tax benefits from both mutual funds and ETF. However, Exchange traded funds have more tax benefits as compared to mutual funds due to the way in which they are formed and then redeemed.

ETF and Mutual Fund Breakdown

If you’re a novice investor going about things in the traditional way, reallocating strategically, you might enjoy how simple a fund can be. While ETFs are known for their accessibility as well, they are more for those who would take the power of being able to trade their shares throughout the day, much like a regular stock. The lower expense ratio of an ETF and the immediacy with which they can be traded at is often used as leverage by institutional investors for directional bets and hedge investments. Mutual funds are traded during Wall Street’s hours, but the actual transition won’t occur until the market has closed. The price of a fund is found by calculating the sum of the stock prices within the fund.

What are the disadvantages of ETF?

In the battle of ETFs against mutual funds, dollar-cost averaging investors will begin to note how expensive ETFs can become due to brokerage fees. A way to preserve money, in the long run, is to invest in a buy-and-hold ETF, but conversely, this exposes investors to something called tracking error. While ETFs are classified as a type of fund, making them liable to the Securities and Exchange Commission’s regulations, they are more complex in their structure and are under the influence of more rules than funds. Trading well with ETFs makes it important that an investor is well-versed in index funds, as that is what ETFs are largely made out of.

Now that you know both advantages and disadvantages of mutual funds and etf, you can make a right investment choice based on your financial goal. With Angel Bee, you can also set your financial goals and find out the funds that best suit your goal. Download the Angel Bee app and get started on a smart journey to achieve your dreams.

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