Mutual Funds or ETFs: Which one to go for?

Whether to invest in mutual funds or Exchange Traded Funds is one of the most prevalent queries investors have. Continue reading to learn more.

We frequently receive questions about passive investing, one of which is whether to invest in exchange traded funds (ETFs) or mutual funds. Both the investment options are constructed in such a manner that they give investors exposure to a diverse range of securities. The significant distinctions between them, however, are in terms of openness, costs, and investment. 

In terms of transparency, ETF holdings are revealed daily, so as an investor, you know precisely what you own. Mutual fund holdings are announced on a monthly basis, which is inherently a lag. What the mutual fund actually owns may alter by the time the holdings are publicised.  

The expense ratio of an ETF is substantially lower than that of a mutual fund. To illustrate, the fee ratio of an index fund with a normal plan is close to 1 per cent, whereas ETFs have an expense ratio of less than 0.3 per cent. Among equity funds, index funds have the lowest expense ratio. As a result, the expense ratio of other equity funds is on the higher side. 

The final significant distinction between the two is investment. There is a concept of cut-off time when investing in a mutual fund. As a result, if you invest in mutual funds before 3:00 PM, you will receive the same day NAV; otherwise, the next day NAV will apply. In the case of ETFs, however, you can invest at any moment during market hours. This provides you the freedom to invest based on your market research for the day. 

The major distinctions between mutual funds and ETFs are listed below.