Difference Between ETF And Mutual Fund

Mutual funds are the traditional way of investing in securities, where multiple investors pool their investments with the help of a broker. ETF (Exchanged Traded Funds) have grown in popularity in the past couple of decades, where funds are invested in a pre-determined portfolio of securities.

Mutual funds can only be traded at the end of the day or the trading session, where a net asset value (NAV) will be determined. This figure will then be considered the benchmark for paying out or charging the investors. ETF on the other hand, can be traded through the market hours where investors can purchase and sell stocks depending on the changes in prices.

Despite both funds being handled by managers, the expenses will vary, with mutual investments taking a larger chunk in fees as compared to ETF. Mutual funds follow an active trading methodology as compared with ETF, which remain passive in nature due to the index-tracking mechanism.

The performances of these two funds also vary to a certain extent. Stock prices in ETF will not be as volatile as it tracks the performance of the index. However, more information will be disclosed by the fund holder in order to present a true market picture to the investors. Any changes will hence be accommodated, depending on how much a price has strayed away from the index product.

In case of mutual funds, managers will need to disclose less information, usually quarterly, giving them the opportunity to make amendments in the portfolio, and allowing them to show a favourable view of the securities.

The tax status on both types of funds also differs. Mutual funds are subject to capital gain taxes as the investment is a pooled one. Whenever an investor seeks a buyout, it impacts all other investors, who will then be liable to pay tax even they hold the shares. On the contrary, ETF is an agreement between two individuals where they trade a basket from each other, allowing no room for capital gain tax.

Instructions

  • 1

    Mutual Funds

    A mutual fund is a professionally managed collective investment tool which allows people to pool their money to buy various securities. This work is usually carried out by an investment company, which hires an investment agent who looks after these securities.

    -Image courtesy: etftrends.com

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    Exchanged Traded Funds

    ETF is an investment fund, which is traded on the stock exchange. It usually follows a market index by tracking its performance but works just like any other stock.  They are an attractive source of investment due to the low cost and tax efficient status.

    - Image courtesy: etftrends.com

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