• HDFC securities
• 13 Jan 2023
• Knowledge Centre

There are several investment options available for investors in the market. They invest their money based on their objectives and risk appetite. Two of the most popular investment vehicles are Exchange-Traded Funds (ETFs) and Mutual Funds. Both offer investors the opportunity to diversify their portfolios and access a wide range of asset classes and strategies.

However, ETFs and mutual funds differ in various ways. This article will compare both to provide investors with a better understanding of the differences between them and which one may be best suited to their investment needs.

Mutual Funds

Mutual Funds are investment vehicles that pool money from several investors and invest in various securities like equities, debt, bonds, and government securities. These funds are managed by highly qualified fund managers who make sound investment decisions backed by comprehensive research and advanced strategies.

The investors buy units of mutual fund schemes whose portfolio is tailored to match the investment objectives of the scheme. Investors buy the units of mutual fund schemes. The returns generated by these funds depend upon the performance of the underlying assets.

Based on the asset allocation, mutual funds are of three types - equity funds, debt funds and hybrid funds which invest in a mixture of securities.

ETFs

Exchange Traded Funds (ETFs) are passive investment vehicles that track a particular asset class or its composition. ETFs can track assets like indices, bonds, and commodities. An index ETF will comprise all the different constituents of the index. Being a passive fund, ETFs aim to replicate the returns of the underlying asset. The biggest difference between ETF and mutual fund is that an ETF is traded on the stock exchange just like other stocks and its value fluctuates throughout the day.

Now, let us look at the difference between ETF and mutual fund and which is better ETF or mutual fund.

Nature of investment

Mutual funds invest in various securities like stocks, debt instruments and government securities. ETFs track an asset class or an index. These funds invest in the constituents of an index or asset class and are passively managed funds.

Method of trading

Mutual funds are traded daily. An investor can purchase a mutual fund unit at the Net Asset Value (NAV) of the fund which is calculated at the end of the day. Whereas an ETF is traded on the stock exchange just like any other share and its value fluctuates throughout the day.

Lock-in period

Certain mutual funds like an Equity-Linked Savings Scheme (ELSS) have a lock-in period of 3 years, while ETFs have no lock-in period and can be bought or sold easily. ETFs provide relatively higher liquidity than mutual funds.

Costs

Mutual funds can charge high operating expenses and fees. ETFs tend to have lower expenses and cheaper transaction costs.

It is not easy to know which is better ETF or Mutual fund. Ultimately, it’s important to consider your financial goals, risk tolerance, and current market conditions before deciding which is better for you. For accurate investment projections and to plan accordingly, you can also use the SIP Calculator by HDFC SKY to understand potential returns.