There are various investment options available in the market today. Many diverse investment products are available in the market, serving a variety of consumer personas and needs. With such a variety of investment products available, the universe of investing might seem daunting.
Two very popular investment products, the choice between which can be confusing, are mutual funds and exchange traded funds (ETFs).
The process of investing in them and their suitability for financial goals and risk appetite are different.
Here is a blog to help you deeply understand the world of ETFs and mutual funds. We will explore their nuances, trading/investing mechanisms, and suitability for various investor risk and return profiles.
What Is An ETF?
ETFs, also known as Exchange-Traded Funds, are baskets of securities. These securities can include stocks, bonds, commodities, and more. They are called exchange-traded because an investor trades them on a stock exchange, much like individual stocks.
You can think of it as a pre-packaged portfolio enabling you to invest in a diversified collection of assets with a single purchase. These are a type of passive mutual fund.
For example, an ETF that tracks the Nifty 50 index will hold shares of all 50 companies included in the index. It would include these shares in the same proportion as the index. This can provide instant portfolio diversification. It can also expose your portfolio to a broad market segment without buying each stock individually.
ETFs are known for their flexibility, liquidity, and economy or cost-effectiveness. They can offer the diversification benefits of mutual funds combined with the trading flexibility of individual stocks.
What are Mutual Funds?
A mutual fund pools money from multiple investors to invest in a diversified portfolio of securities. Professional fund managers manage these funds and make investment decisions based on the fund’s investment objective.
You essentially buy units or shares of the fund by investing in mutual funds. You can invest in units of a mutual funds scheme. The value of your investment fluctuates with the performance of the underlying securities held by the fund.
How Can You Trade ETFs?
ETFs’ trading flexibility is one of the most significant advantages of this investment type. ETFs are listed on stock exchanges. Therefore, you can trade, buy, and sell ETFs throughout the day. This is just like individual stocks. This intraday trading capability can provide greater control and allow you to move quickly to market changes.
You must open Demat account with a brokerage firm to trade ETFs. It is essential to have a Demat account to hold and trade securities electronically. Once you have a Demat account, you can place buy and sell (trade) orders for ETFs through your broker’s trading platform or ETF app.
The price of an ETF can fluctuate throughout the day. It can change tick-based, like stocks based on the market demand and supply. This real-time pricing can help you track the value of your investment and make informed trading decisions.
How To Invest In Mutual Funds
So, you have just learnt about investing in ETFs. But what about types of mutual funds? Can they be invested in the same manner?
Let us find out.
Investing in mutual fund types typically involves a process different from trading ETFs. Most mutual funds can be bought and sold directly through the fund house or brokerage apps.
You can invest in mutual funds through various channels. These include the following:
- Many fund houses allow investors to invest directly through their websites. You can create an account, complete the KYC (Know Your Customer) process, and invest.
- Mutual fund distributors, such as banks and financial advisors, can help you select and invest suitable funds based on your financial goals. These are also known as mutual funds app platforms.
- Several online platforms offer various mutual funds from different fund houses. This makes comparing and investing in funds convenient.
Unlike ETFs, mutual fund transactions are typically processed once a day, at the end of the trading day. Therefore, the price you pay or receive for your mutual fund units is based on the Net Asset Value (NAV), calculated at the end of the day.
Can You Trade All Mutual Funds On a Stock Exchange?
No, you cannot trade all mutual funds on a stock exchange. While some mutual funds are listed on stock exchanges, these are typically exchange-traded funds.
However, most are not listed on stock exchanges and are bought and sold directly through the fund house or distributors.
Who Should Invest In ETFs Vs. Mutual Funds?
You can choose between ETFs and mutual funds depending on your investment goals, risk appetite, and trading preferences.
Here is a breakdown of investors who might find each option better:
ETFs
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Active Traders
ETFs can be a better choice if you prefer to actively manage your investments and take advantage of intraday price movements.
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Cost-Conscious Investors
ETFs are passive funds. They generally have lower expense ratios than actively managed mutual funds, making them attractive for cost-conscious investors.
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Investors Seeking Specific Market Exposure
ETFs offer targeted exposure to specific sectors, industries, or asset classes, allowing you to tailor your portfolio to your investment strategy.
To invest in ETFs, you will need to open a Demat account. A Demat account is essential for electronically holding and trading securities (like ETFs).
Mutual Funds
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Passive Investors
Mutual funds might be a better option for investors who prefer a hands-off approach and are comfortable with professional fund management.
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Investors Seeking Diversification
Mutual funds can offer instant diversification across a range of securities. This can reduce risk and enhance potential returns.
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Investors With Long-Term Goals
Mutual funds can be a better option for long-term financial goals, such as retirement planning or wealth accumulation.
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Individuals Who Want To Invest Small Amounts Regularly
Mutual funds can help you invest smaller amounts regularly through Systematic Investment Plans (SIPs), making it easier to build wealth gradually.
ETFs and mutual funds can provide you with varying degrees of risk and return combinations. However, a better selection between the two can depend on your financial goals, appetite for risk and preferences. You may even invest in ETFs and mutual funds to further diversify your portfolio and achieve your financial goals.
Conclusion
ETFs and mutual funds can be valuable investment products catering to different investor profiles. Among the two, ETFs can offer liquidity, inexpensiveness, and targeted market exposure. Similarly, mutual funds can provide a choice of professional management (active or passive), diversification, and convenience. So, it is crucial to carefully consider your financial goals, risk appetite, and investment horizon for making any investment decision. You can research different ETFs and mutual funds, compare their features and costs, and choose the option that might align better with your needs.
