Why Opt for ETFs Over Mutual Funds?

The importance of securing your financial future is imperative. There presently exist different avenues via which you can do this such that your money generates sufficient returns keeping in mind your financial goals. Mutual funds and exchange-traded funds (or ETFs) happen to be some of the more popular of these avenues. But the question here is, why opt for ETFs over mutual funds?

While both of these securities may seem similar at first glance, there exist several differences that appear when they are examined more closely.

Angel One provides educational content on its website under its Knowledge Center that is geared towards educating you on these differences as well as providing insights into investing and financial markets. Continue reading to understand what each of these two securities is.

Mutual Funds

These professionally managed investment schemes pool together money from a number of investors and then use it to invest in diversified holdings.

Securities ranging from stocks and debt instruments to bonds are invested in by mutual funds. Each mutual fund scheme has a net asset value (or NAV) that is derived once the mutual fund in question’s total investment has been divided by the number of its investors.

Exchange-Traded Funds

These funds are passively managed and replicate a market index. Ordinarily, stocks held in ETFs are held in the same weight as they are by the underlying index they are based on. No fund manager is responsible for managing ETFs as they merely track the performance of a given index.

These funds trade actively on stock exchanges and can be bought and sold freely over the course of a trading session.

Why Choose ETFs Over Mutual Funds?

In order to understand what makes exchange-traded funds stand out when set against mutual funds,
consider the reasons below.

  1. Easy Liquidity – For starters, investors have the freedom to trade ETFs at their convenience. The market price of ETFs is available in real-time and operates in the same manner as equity shares. In contrast, units of mutual funds can only be purchased or sold once the investor places a request with the concerned fund house. The NAV is used to indicate what the price of a single unit of a given mutual fund amounts to.
  2. Lower Expense Ratio – Owing to the fact that the performance of ETFs depends on indexes alone, it isn’t necessary for them to be actively managed. This lack of active management means that expenses associated with ETF investments are fairly low. In contrast, mutual funds often utilize the services of a fund manager such that investment decisions can be made on behalf of investors. These services result in fund management expenses associated with mutual funds being comparatively higher.
  3. Shorter Lock-in Period – Those that choose to invest in ETFs aren’t required to abide by a minimum holding period and have the freedom to sell their holdings as per their convenience. In contrast, mutual funds have a lock-in period that may range from 9 days to 3 years that varies in accordance with the mutual fund scheme selected. During this time, investors aren’t entitled to liquidate their holdings.

Wrapping Up

To summarise, exchange-traded funds are worth investing in as they provide a number of benefits that mutual funds may lack. Since they can be bought and sold at any time, investors can make timely investment decisions and can place their orders in a manner that suits them best. Next, they allow for portfolio diversification and risk management.

They also incur lower costs making them more pocket-friendly for investors. Finally, they don’t tie down investors or make them obligated to stay invested for a minimum time frame. If you wish to start your investing journey, you can do so by heading to the Angel One website and learning more about ETFs as well as investment strategies.

Disclaimer

  1. This blog is exclusively for educational purposes
  2. Investments in the securities market are subject to market risk, read all the related documents carefully before investing.
  3. Brokerage will not exceed the SEBI prescribed limit. https://bit.ly/2VBt5c5

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