Similarities and Differences Between ETFs and Other Mutual Funds

Mutual funds are a pool of professionally managed funds that invest across various fixed income securities and company stocks for income generation. These are a pool of professionally managed funds that invest in equity, corporate securities, government bonds, certificates of deposits, commercial papers, debentures, treasury bills, etc. Market regulator SEBI describes mutual funds as “a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced”.

SEBI has further categorized mutual funds based on certain unique features like asset allocation strategy, risk profile, investment objective, etc. The motive behind categorization is to bring all similar schemes under one umbrella so that investors are able to take an informed investment decision. Exchange traded funds abbreviated as ETFs are a mutual fund category that invest in a minimum of 95 percent in any one particular asset. In the recent past, ETFs have gained wide acclamation among other financial instruments. ETFs have become widely popular among seasoned as well as new age investors. Securities and Exchange Board of India (SEBI), the regulator of mutual funds in India defines ETF as, “an open ended scheme which replicates/tracks the particular index. Of the total assets, this fund must invest a minimum of 95 per cent in securities of a particular index (which is being replicated or tracked).” Exchange traded funds follow their benchmark, which could be anything like SENSEX, NIFTY, gold, real estate, etc.

Difference between mutual funds and exchange traded funds (ETFs)

ParameterMutual FundsExchange Traded Funds
DefinitionMutual funds aim at generating by investing in a diversified portfolio of securitiesETF are open ended schemes which replicates/tracks the particular index. Of the total assets, this fund must invest a minimum of 95 per cent in securities of a particular index
Buy / Sell of SecuritiesMutual fund investors can buy or sell their securities on any working dayETF units can be bought or sold just like any other company shares at the stock exchange
Demat accountOne does not need a trading account or a demat account to buy or sell mutual fund unitsOne cannot trade in ETFs without a demat account
Tax benefitMutual fund schemes like ELSS come with a tax benefitETF investments do not have any tax unit
Lock in periodSome mutual fund schemes come with a predetermined lick in period. Investors cannot redeem or withdraw their fund units during this lock in periodETFs do not come with a lock in period. Investors can add ETFs to their portfolio for liquidity and diversification
Types of fundMost mutual funds are actively managed schemes where the fund manager actively buys and sells securities in quantum with the investment objective of the scheme so that the scheme manages to outperform its underlying benchmarkETFs are passively managed schemes which means there is no active participation of the fund manager
Expense ratioMutual fund schemes generally carry a high expense ratioPassively managed funds like ETFs carry a comparatively low expense ratio

Now that you know the difference between mutual fund schemes and ETFs, where are you planning on investing in? No matter where you invest, do consult a financial advisor before making the final decision. Afterall it is your hard earned money which you will be investing. Do remember that neither of the market linked schemes offer guaranteed returns. It is always better to determine your risk appetite before investing in any type of mutual fund scheme.

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