Mutual Funds Vs. ETF: Know the Better One With Key Differences

Many of you may think of comparing ETF vs mutual funds because they seem like different investment options. That is both true and not, as ETFs are a type of mutual fund. 

You can choose either one, no matter whether you are a first-time investor or have some experience investing in the stock markets. 

It’s important that you understand how ETFs differ from other mutual funds to make the right call and get maximum returns with the lowest exposure to risk. Here is a brief guide to mutual funds and ETFs. 

Introduction to ETF

It is a type of mutual fund, so it pools funds from investors into different assets and mitigates the stock market investment risks. It invests in commodities, bonds and stocks. However, unlike regular mutual funds, it works by tracking bonds or stock indexes. 

In simple terms, it aims to mirror or trade closest to the index’s benchmark returns. This way, it tries to replicate the performance of the particular stock. This is called passive investing, which differs from active investing. 

Introduction to Mutual Funds 

It is a pool of funds managed by a fund manager to achieve a common goal. All investors get the value for their units based on the ‘Net Asset Value’, which is calculated after deducting the expenses from the total returns. 

Difference Between ETF and Mutual Funds

When comparing ETF vs mutual funds, keep the following in mind: 

Mutual Funds	ETF
The NAV stays the same during the day	Its value changes during the trading hours of the day
They may have higher operating expenses (expense ratios)	The operating expenses are low
Fund managers may actively or passively manage these funds	It tends to have a more passive approach to managing the funds
You may have to start investing with a certain minimum amount	You can start investing without any minimum requirements
They may have lower liquidity	They have higher liquidity
You can buy them from AMCs or regulated parties and it is not compulsory to have a Demat account	You can buy them on the stock exchange and need a Demat account

Also Read: Compounding in Mutual Funds

Which is Better: ETF or Mutual Fund?

Choosing between mutual funds and ETFs depends on your individual decision. You should consider your risk appetite, investment horizon and financial objectives to choose accordingly. Both are great for diversifying your portfolio. 

One thing to keep in mind when considering the benefits of ETF vs mutual funds is liquidity. You can choose ETFs for instant redemption, but mutual funds can be the right choice for a long-term investment. It may be a good idea to choose different types of mutual funds and ETFs by analysing the risks and rewards. You should also carefully decide how long you wish to stay invested. This is because lock-in periods can restrict your finances. 

In case you find yourself needing quick access to funds, you can opt for a Fibe Loan Against Mutual Funds. We offer loans starting from ₹15,000 up to ₹10 lakhs by using your mutual fund as collateral. This way, you can continue your investment. To get started, download the Fibe App and apply now. 

FAQs on ETF Vs Mutual Funds

Can I invest in both ETFs and mutual funds for retirement?

Yes, you can choose mutual funds and ETFs to build your retirement corpus by staying invested for a longer period. 

How do tracking errors differ between ETFs and mutual funds?

The tracking error for ETFs and index funds, which are both types of mutual funds, is similar. It shows how well the fund is replicating the benchmark. Funds with a lower tracking error are considered more desirable in both cases. 

Can I automate my investments in ETFs like I can with mutual funds?

Usually, automating investments in ETF is not possible. This is another key difference when considering ETF vs mutual funds.