Personal Finance

ETF vs mutual funds: Here's how they compare

Updated : January 06, 2021 07:57 PM IST

There are several investment avenues available in the market that help individuals to generate adequate returns.

These include mutual funds (MFs) and exchange-traded funds (ETF).

There are several investment avenues available in the market that help investors with low-risk appetite to generate adequate returns. These include mutual funds (MFs) and exchange-traded funds (ETF). Both of these options look quite similar, but when analysed carefully, there are differences between both of them.

Exchange-traded funds or ETFs, types of investment funds, are bought and sold throughout the day on stock exchanges. So, their market price is available in real-time just like ordinary equity shares.

On the other hand, mutual funds are bought and sold based on their price at the day's end. These can be bought or sold only by placing a request with the fund house.

In terms of the lock-in period, ETFs do not have a minimum holding period, and the investors are free to sell the investment as and when they like.

Mutual funds like ELSS (Equity Linked Savings Scheme), as ClearTax -- investment platform explains, come with a lock-in period of 3 years.

"During this timeframe, it is not possible to liquidate the investment. This can range from 9 days to 3 years, depending on the mutual fund scheme chosen," ClearTax illustrates.

Additionally, mutual Funds have lower liquidity compared to ETFs. ETF has higher liquidity since it is not connected to its daily trading volume. Rather it is related to the liquidity of the stocks included in the index.

Another difference is in transaction costs.

Compared to ETFs, the transaction costs are zero when mutual fund shares are bought or sold. While, there is an additional cost involved while trading ETFs, which is called the bid-ask spread, according to Bankbazaar.

In the words of Arshad Fahoum, Chief Product Officer, Market Pulse, ETFs today basically span the gamut of commodities, bonds, real estate, currencies, stocks and many other niche and important areas.

"Investment amounts and cost structures are largely kept low, and the many possibilities for liquidity save young investors from slipping into the quicksand of market complexities and uncertainties. There’s also scope to customize ETF investments to suit the markets or segments that are of particular relevance to the investor individually. In fact, these factors give ETFs a leg up over index mutual funds as sound investment decisions," he opines.

ETF vs mutual funds: Here's how they compare

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