- Date : 12/03/2023
- Read: 4 mins
If you are an investor and want to invest in ETFs or mutual funds, this article might be helpful for you.
Many investors find it difficult to invest in the stock market because they lack information. People also want to avoid high-risk investments. However, there are two popular and comparatively safer investment types: exchange-traded funds (ETFs) and mutual funds, which minimise the risk of market losses.
ETFs vs. Mutual Funds
Recently, exchange-traded funds (ETFs) have become a hot topic of discussion among investors. These funds look like mutual funds since they collect investors' money to buy a diverse portfolio of different kinds of bonds and stocks. Investors see it as one of the best investment channels. So what is the exact difference between ETFs and mutual funds?
ETFs (exchange-traded funds) and mutual funds are similar in many ways. However, one key difference is that ETFs can be bought and sold through a brokerage, like individual stocks, while mutual funds are typically purchased through a fund management company.
Also read: Best ETFs to invest in India
What Is an ETF?
Those investment funds that are traded on the stock exchange are called exchange-traded funds (ETFs). ETFs typically contain a mix of commodities, stocks, and bonds, and their prices usually remain close to their original net asset value. Most ETFs track a stock or bond index and are known for having lower fees and higher daily liquidity than mutual fund shares.
ETFs' liquidity and lower fees than mutual fund schemes make them an attractive place for investors.
The key advantages of Exchange-Traded Funds (ETFs)
Diversification: ETFs provide a diversified portfolio of stocks, bonds, etc. that reduce the risk of an investor's portfolio.
Low cost: Lower fees make ETFs an attractive option for investors looking to minimise costs.
Liquidity: ETFs have high liquidity. It can be bought and sold on the day of trading, just like individual stocks.
What are Mutual Funds?
Mutual funds are a type of investment fund that is managed by experts. In mutual funds, investors pool their money together, which is then used to purchase a diversified portfolio of stocks, bonds, and money market instruments. This diversification of assets helps reduce the risk of investment. As an investor in a mutual fund, you can make a profit or loss just like other shareholders.
When investing in a mutual fund, you are buying shares that represent a part of the investment in the fund. The value of these shares depends on the performance of the investments held by the fund. If your investments perform well, the value of your shares will increase. If the investments perform poorly, the value of your shares will decline.
What are the differences between an ETF and a mutual fund?
The key differences between mutual funds and exchange-traded funds (ETFs) are:
Average Returns on Mutual Funds and Exchange Traded Funds
On average mutual fund gives nearly 10-16% returns. However, this varies with several factors, such as risk, duration, and economic condition of the country.
ETFs give average returns between 9-15% depending on the duration of investment and the performance of underlying bonds.
Investors can access a comfortable and diversified portfolio to engage in the stock market through mutual funds and ETFs alike. They also reduce the risk of financial loss in the market. When deciding on an investment in mutual funds or ETFs, it is essential to carefully evaluate your investment objectives, risk tolerance, and individual circumstances. Always stay informed and work with a qualified financial advisor to develop the right investment strategy.