ETFs vs Mutual Funds: Which one is better to invest?

First-time or young investors often find it difficult to decide on the right investment. Most of the time, they lack the knowledge of stock market investments, or have limited funds. And the industry focuses on advertising products rather than educating new investors about wealth management.  

In this article, let's understand how ETFs are different from Mutual Funds.  

What are ETFs?

ETF or Exchange Traded Funds is a group of different kinds of shares, bonds, etc. In simple words, ETFs are a mixture of various investment avenues. The ETFs offer almost all the benefits of mutual funds and are almost similar in structure, regulation, etc. Also, like mutual funds, ETFs offer a wide range of asset classes like commodities, currencies, stocks, or a mashup of all these. Also, you can even trade ETFs on the stock exchanges. If you are looking to get the benefits of both mutual funds and stocks, ETFs are the best options. 

Pros and Cons of ETFs

Pros

• ETFs are a good option in terms of liquidity as you can sell them throughout the day over stock exchanges. 
• The ETFs' expense ratios are much lower than the traditional mutual funds. 
• ETFs are transparent as they disclose the fund's holdings daily for both open-ended and close-ended schemes. 
• As you invest in ETFs, you can diversify your portfolio across horizontals that include sectors, industries, styles, or countries. 

Cons

• You need to pay the trading fees. Although the cost may be lower when compared to MFs, it is not free. 
• The tracking of your holdings is often difficult, and you may face the issues of tracking errors. 

Also Read: How Much Do you Know About Investing in Mutual Funds?

What are Mutual Funds?

Mutual funds are a popular investment option for young investors. You may not avail MFs through all brokerages, but you can easily make a purchase directly from the fund family. The fund families ensure that the investors invest the money at set intervals, and this pattern is helpful for those trying to build consistency in their investment pattern. 

MFs are comparatively expensive, but there is a reason for that. The inclusion of the 12b-1 fees makes the funds a bit costlier. But the fees brings extra advantages. The MFs are actively managed, reducing the risks for young investors. 

Related Article: 6 Reasons Why You Should Invest in Mutual Funds

Pros and Cons of MFs

Pros 

It is easier for you to buy MFs and relatively easier to exit from a mutual fund scheme unless you opt for a close-ended scheme. 

Your funds are actively managed and distributed well across all sectors and companies. It reduces the risk, as when one sector under performs, the other sectors make up for the loss. 

MFs are best for people who don't have much time to research the market before investing as everything is taken care of by the fund manager. 

The process of investing in a mutual fund scheme is quick and hassle-free. 

Cons

• The management fees of the MFs are higher, and they don't  guarantee a good performance of your funds. 
• Although diversification offers some advantages to you, at the same time, it can reduce your profits.

Also Read: How to Build Your Mutual Fund Portfolio From Scratch? 

Which one is Better for young investors?

Both the investment options are good for young investors to build a diversified investment portfolio. However, while making the decision, you need to consider factors that include your risk appetite, financial goals, investment horizon, etc. After properly considering these strategies, you can choose between ETFs and MFs. If you are looking for a high return in a short time, go for ETFs, and go for MFs if you want to invest for a comparatively longer time.