These days making an investment decision can become though as there are thousands of investment products to choose from. Be it conservative schemes or market linked schemes, if you do not have clear perspective on what you want to do with your finances, you may end up investing in the wrong type of investment avenue. Depending on your investment horizon, your appetite for risk and your existing liabilities, your financial advisor may suggest you schemes that are likely to churn decent capital appreciation over the long term. This list of investment avenues may also include mutual funds and exchange traded funds. Now if you are in a dilemma and don’t know which to go or whether to invest in both of them, here are few things you may have understand about both before making an investment decision.
Exchange Traded Funds – What are they?
The units of an exchange traded fund can be traded throughout the day as per its current market price. The NAV of an ETF fluctuates just like the share price of company stocks. Investors need a demat account to start their investment journey in exchange traded funds. Exchange traded funds are a type of a mutual fund scheme whose underlying securities usually belong its underlying index. For example, an ETF dealing with NIFTY50 will only invest in stocks of top 50 companies that are publicly listed at the NIFTY index. As per SEBI guidelines, an ETF must invest maximum of its investible corpus in the benchmark whose performance it tries to replicate for generating capital appreciation. ETFs offer passive management which means there is very little human emotion involved in the scheme’s pursuit of generating revenue.
Mutual funds – What are they?
A mutual fund is a basked of securities whose underlying portfolio determines its performance. Mutual funds like equity funds have a high risk returns tradeoff. Some mutual funds like ELSS even come with a predetermined lock-in period of three years. Mutual fund investors can buy or sell their fund units but have no control over its underlying securities. It is the job of the fund manager to buy and sell securities in quantum with the investment objective of that particular mutual fund scheme. Most mutual funds offer active risk management and are further categorized as equity, debt, index, hybrid, ELSS, gold funds, solutions oriented schemes etc.
ETFs v/s mutual fund schemes
If you are still finding it tough to determine where to invest your hard earned money, the following differences might help you have a clearer perspective –
| Comparison based on | ETFs | Mutual fund schemes |
| Management Style | Exchange traded funds are passively managed funds. The fund manager only reshuffles the portfolio from time to time to ensure that the scheme is aligned with its investment objective | Mutual funds follow an active management strategy. Here, the fund manager invests in a basket of securities and constantly buys /sells them in such a way the investment objective of the scheme is achieved |
| Investment style | Investors can buy or sell their ETF units at their own will | Investors cannot shuffle the underlying securities of a mutual fund portfolio. They can only place a request to buy or sell their mutual fund units to the fund manager |
| Liquidity | Since investors can live trade ETF units, they offer high liquidity | Liquidity is restricted and some schemes like ELSS even come with a statutory lock-in period |
| Management costs | Since ETFs offer passive fund management, they have a low expense ratio and are more cost effective between the two | Expense ratio of actively managed mutual funds is much higher |
If you still aren’t able to determine which investment scheme is more relevant for your financial goals, seek professional consultation.
