Securing your financial future is one of the most critical tasks that you need to perform. There are various options available for you to ensure that your money generates adequate returns as per your financial goals. Out of the many investment options available to investors in India, Mutual Funds and ETFs are amongst the most popular ones.
They both look quite similar at first glance, but when analyzed carefully, there are differences between both of them. Let’s get to know the difference between these two investment options and understand which one of these you should choose.
Mutual funds can be described as professionally managed investment schemes that collect money from various investors and then invest it in diversified holdings. Mutual funds invest in a wide range of securities such as stocks, bonds, debt instruments and much more. Each scheme has a defined NAV (Net Asset Value) which is derived after dividing the total investment of a mutual fund by the number of investors.
ETFs or Exchange Traded funds are passively managed funds that merely replicate an index. These funds usually hold all the stocks in the same weight as they are held by the underlying index. ETF is not actively managed by a fund manager. It just tracks the performance of the index. ETFs are actively traded on a stock exchange and can be freely purchased and sold throughout the trading session.
The decision between a mutual fund and an ETF is one of the major conundrums for an investor while taking an investment decision. Though both these products look quite similar, there are differences between them. Following are the significant differences between Mutual Funds and ETFs.
Both of the investment options mentioned above offer you an excellent way to build a diversified investment portfolio. As to which option should be chosen, there are many factors that need to be considered, such as: –
When you have answered these questions, you will be able to narrow down as to which of the above two options you must choose. ETFs offer you more flexibility and higher returns in the short-run while mutual funds require you to stay invested for a comparatively extended period but help create a corpus for the future. The decision has to be entirely yours but must be taken after careful consideration.