Last Updated on January 24, 2023
Both mutual fund and exchange traded fund are investment avenues. The differentiation between mutual fund vs ETF helps to understand key distinction between them. In both securities pool of funds are created by mobilizing money from investors’. The funds in both mutual funds and exchange traded funds are invested in various securities like equity, debt, derivatives, commodities, etc., and a fund portfolio is created. These portfolios are manage by the fund managers.
Mutual fund vs ETF
Exchange Traded Fund (ETF)
An ETF is a basket of securities or can say a portfolio consist of different types of securities which is traded on stock exchanges just like a stock. The price of ETF fluctuates with the volatility, supply and demand of the ETF. The ETF contains all types of investment avenues including stocks, commodities, bonds.
The ETFs are passively managed funds as it replicate or follows a particular index and investment is made in the same securities that compose a specific index.
For example- if an ETF is following Nifty50 index of NSE then the ETF portfolio consist the same securities and in the same proportion that the index contains. With the fluctuation in the value of the Nifty50 index, the price of the ETF also fluctuates and in the same manner.
Example 2- the SPDR S&P 500 ETF (SPY) the oldest surviving and most widely known ETF which tracks/follows the S&P 500 index which comprises 500 large-cap. and mid-cap. U.S companies stocks.
ETFs have low expense ratios and the price of an ETF change in real-time. It is regulated in India by the Securities Exchange Board of India (SEBI) and in America by the Securities Exchange Commission (SEC).
Types of ETFs
- Bond ETF- It invest in bonds which are generally of bonds issued by government, corporates or bonds issue within the states and local boundaries.
- Industry ETF- It tracks particular industries such as metal, technology, banking or pharmaceuticals, etc.
- Commodity ETF- Invest in various commodities includes crude oil, metals, or gold. The value of ETF fluctuates with the change in the price of the underlying commodities.
- Currency ETF- Invest in foreign currencies such as the British Pound, Japanese Yen, Euro, and Dollars.
- Inverse ETF- It attempts to earn gains from stock prices decline by short-selling of stocks. The stocks are sold in the market expecting a decline in the value and repurchasing the following stocks at a lower price.
- Sector ETF- It follows or tracks specific industries such as financial services, real estates, energy, pharmaceuticals, transportation, biotechnology, information technology, etc.
- Physically backed ETF- It tracks or follows the spot market price of gold. The gold is kept hold in the vaults in the form of bullion, coins, and bars on behalf of investors’. The price of the physically-backed ETF fluctuates with the change in the value of gold.
Mutual fund is created as a trust in which money from the investors’ are mobilize and a pool of fund is created. This pool of fund then invested in various different investment avenues by the fund manager who is appointed by the asset management companies (AMCs).
Mutual funds offer investors’ the opportunity to earn income and build wealth through the professional management of their funds. Investing in the units of a mutual fund scheme provide investors exposure to a range of securities held in the investment portfolio of the mutual fund schemes in proportion to their holdings in the schemes.
Net Asset Value (NAV) of the mutual fund scheme is calculated on the daily basis and after deduction of expenses and costs, the income from the scheme is distributed among the investors’ according to their proportion. Even a small investor can invest in mutual funds with a minimum amount accepted (Rs. 500 in India) through the systematic investment plan (SIP) route. Mutual funds can be managed actively and passively and the expenses on various schemes vary accordingly.
There are various types of mutual funds available in India. Check here!
6 key difference between mutual fund vs ETF
|Investment||According to specific index it replicates/follows||Diversified securities according to the scheme objectives|
|Traded at||Stock exchanges||Directly by the AMCs and Stock exchanges|
|Cost/Expenses||Low compared to mutual funds||Low|
|Management||Passively||Both actively and passively|
|Price||Determined by the volatility, demand and supply in the market||Determined by the net asset value (NAV) of the mutual fund schemes.|
|Lock-in||ETFs did not have lock-in periods||Some mutual fund schemes have lock-in period|
He is graduate in M.B.A Finance, and owner of the financial blog “Saifwealth.com“. He started this blog to share his knowdelge in the field of finance and to help people understand and aware about the financial world.
2 thoughts on “Mutual fund vs ETF – 6 Key differences”
Congratulations Sir. Different types of ETF is brought out with clarity.
I was wondering if you ever considered changing the layout of your blog? Its very well written; I love what youve got to say. But maybe you could a little more in the way of content so people could connect with it better. Youve got an awful lot of text for only having 1 or 2 pictures. Maybe you could space it out better?