Making your financial future secure is one of the most important things you should start doing now. Many options present for your right in the financial markets ensure that your money gets good returns per your financial aims. Investors confuse between an ETF and mutual funds because of the numerous investment options. This is because they are quite similar to each other in the eyes of the newbie investor. But when they are scrutinized carefully, there are some differences that separate both these financial instruments. Let us try to find out more about an ETF or mutual funds and also try to find out which one you should go for as an investment vehicle.
These are financial instruments that are managed professionally by qualified and trained money managers. These funds take money from different investors and then invest it in various holdings. Mutual funds invest in various securities, including debt instruments, bonds, shares, and a lot more. Each scheme has a certain net asset value, which is found after dividing the overall investment of a mutual fund by the total number of investors.
These are those financial instruments that are managed passively. This means no professional manager is looking after and managing these funds. These instruments only duplicate the movements of a certain index. They typically hold all the stocks in the seams weights as they are held by the actual index. So, they only track the overall performance of an index. These instruments are actively traded on the financial markets. They can be openly purchased and sold throughout the trading session.
Choosing ETF or mutual funds is one of the major issues for any investor looking to invest in the financial markets. Both of these instruments are quite similar looking. But there are several differences among them. We will look at the major differences that will help you choose between ETF or mutual funds. The first thing is flexibility. These instruments are traded freely on the financial markets. They can be sold and bought ads at the convenience of the investor. The market prices are real, just like the usual equity shares. The mutual fund units can be sold or bought by giving a request at the fund house. The next asset value indicates the price of a single unit of the mutual fund. The next differentiator is the fees and expenses. ETFs only duplicate the performance of the index that they track. So, they do not require any active management. So, the expenses and fees associated with these investments are not very high. But when it comes to mutual funds, these are actively managed by a fund manager that takes the decision regarding investments on behalf of the various investors. So, the fund management expenses are much higher.
The ETFs are traded just like any other instrument in the financial markets. So, the investors need to shell out commissions on the purchase and sales of the units per the present rules. But in the case of mutual funds, there is no requirement to pay any commissions for the transactions related to these instruments. The final thing is the lock-in period. ETFs do not have any minimum period of holding. So, the investors can freely sell the instruments if they feel the need for them. But a lot of mutual funds have a lock-in period of at least a couple of years. During this period, they're are not permitted to sell their instruments. The minimum period of lock-in differs from scheme to scheme.
Both of the options of investment mentioned here give you a great way to create a diversified portfolio of investment. There are various factors to consider before you can choose between an ETF or mutual fund. When you have successfully considered all the factors, you will be able to close in on which of these choices you should go for. ETFs, give you higher returns and more flexibility in a shorter period. Mutual funds need you to stay invested for longer but help create a good future corpus. But the decision must be completely yours and should be taken carefully considering all the aspects. You may be interested in creating a diversified portfolio of investments. Then, both of these options can provide great results. But it depends on the financial aims, risk appetite, and period. There are a lot of investors that prefer liquidity in financial instruments rather than long-term gains. Also, you do not have to choose between an ETF or mutual funds. You can invest in both and create a diversified portfolio of investments that can give you stable returns with lower risk.
There are a lot of similarities and differences when you look to choose between an ETF or mutual fund. The former typically have lower fees, and you can trade them intraday just like shares. Both instruments appeal to investors who do not want to take on a lot of risk in the financial markets. But they still carry some risks that the investors should know about before investing in either ETF or mutual funds.