What is the Difference Between ETF and Mutual Fund?

Are you new to investing? Then you must have probably come across the ETFs vs mutual funds debate in your quest for exploring investment options. But, what is ETF or mutual fund, and what is the difference between them?

While mutual funds and stocks have long been popular, many new investors might not be aware of what is ETFs and how exactly they work. ETFs are becoming increasingly popular among investors seeking diversified portfolio options. Similar to mutual funds, ETFs also pool together investors’ money. However, unlike mutual funds, ETF units can be bought and sold on a stock exchange through a brokerage account.

In this article, we will explore the similarities and differences between ETFs and mutual funds and determine which is better. Let’s dive in!

What is ETFs?

An exchange-traded fund (ETF) is a type of collective investment security that operates much like a mutual fund. Generally, ETFs will track a particular index, sector, commodity, or other asset. However, unlike mutual funds, you can purchase or sell ETFs on a stock exchange just like any regular stock of a registered company.

Several ETF options exist for investors. An ETF can be structured to track the price of an individual commodity, a large and diverse collection of securities, or even specific investment strategies.

Now you know the answer to what is ETF, let us answer the question about what are mutual funds.

What are Mutual Funds?

Mutual funds are the most popular investment option that pools investors’ money to invest it in various securities. Mutual funds are actively managed by professional fund managers to generate high returns for their investors. When you invest in a mutual fund, you will have to pay your fund house an expense ratio which is a fund management fee.

However, unlike ETFs, mutual funds are not traded on listed exchanges. This is the key distinction when it comes to ETF vs mutual funds.

Key Differences Between ETFs and Mutual Funds

Here is a breakdown of ETFs vs. mutual funds

Similarities Between ETFs and Mutual Funds

Now that you have the answers to ‘what is ETF’ and ‘what are mutual funds,’ here are the similarities between them:

1. Both mutual funds and exchange-traded funds pool together several investors’ money.

2. Both funds are managed by professional fund managers working with fund houses.

3. Fund managers invest the collected money in a variety of asset types like bonds, stocks, commodities, securities, or a combination of these.

4. Both can be active funds or passive funds.

Mutual funds vs. ETFs: Which is better?

Suppose you want to invest in an index fund. You can either go for a Nifty index mutual fund or an ETF. So, how do you compare Nifty ETF vs mutual fund? Which one is better?

One way to decide is to look at what is more convenient for you. Maybe you do not want the hassle of actively managing a brokerage account. In this situation, it is better to invest in an index fund or index mutual fund. Or, if you want to be actively involved in your investments and take advantage of market fluctuations as they come, you can go for an exchange-traded fund like Nifty ETF.

But, wait, can you invest in both ETFs and mutual funds? Yes! In fact, many seasoned investors recommend this. If you are interested in making a diversified investment portfolio, both these options can give you an excellent way to build one. So, invest wisely.

FAQs on ETFs vs Mutual Funds

Is ETF better than SIP?

ETFs and SIPs serve different investment purposes. The best option depends on your preference. If you want to be actively involved in your investments, you can opt for ETFs. But if you don't want the hassle of actively managing your account, you can consider starting an SIP.

Which is better, ETF or mutual fund?

ETFs are more cost-effective and flexible for active traders. On the other hand, mutual funds are an excellent option for long-term investors seeking professional management. The best between the two depends on your preferences and investment style.

Is ETF better than FD?

While ETFs have the potential to generate higher returns than FDs, they also come with higher risk, making them ideal for higher-risk investors. But if you're risk-averse and are looking for guaranteed stable returns, FDs may be the better choice for you.

What is the difference between mutual fund NAV and ETF NAV?

Mutual fund Net Asset Value (NAV) is calculated at the end of the trading day, while ETF’s NAV fluctuates throughout the day as they trade like stocks on stock exchanges.

Do ETFs grow faster than mutual funds?

The growth of ETF and mutual fund depends on market conditions, strategy, and performance. There is no certainty that one may outperform the other.