There are many type of investment tools available in the market and investment in ETFs is something that we come across often. Exchange Traded Funds (ETF) are quite similar to mutual funds but also quite different.
Both ETFs and mutual funds are types of pooled funds.
Investors contribute their money and create a corpus, which is then re-invest in assets and securities.
There is a major difference between these two securities in the way they are trade and so is their tax treatment.
Fundamentally difference between ETF & Mutual Fund
The first major difference between both these investment tools is the way they are trade and settled.
Mutual funds are trade at the NAV (net asset value) calculate at the end of the day and ETFs being more liquid can be bought and sold at their current market price, similar to intraday trading.
Experts say it can be ideal for investors that continuously track the market as they will be able to book quick profits due to price fluctuations.
Both ETF and mutual funds are almost similar but the way one can invest in them is different.
ETF can be purchase directly from the open market without the need for an intermediary.
In mutual funds the investor cannot purchase them directly.
The need you have to follow a process, fill up forms etc.
Industry Experts say even though it is a very simple process but it is still time-consuming as compared to ETFs.
With mutual fund investments, the fund manager controls the investments but in an ETF, the investor has to decide where their funds go.
Even though it is consider one of the best investment tools, experts say one of the drawbacks of mutual fund investments is the mandatory lock-in period.
Depending on the type of fund the lock-in period ranges from being anywhere between 3 months – 3 years, wherein an investor cannot sell or redeem his/her mutual fund during this time.
Selling or redeeming is either prohibite or subject to penal charges during the lock-in period.
ETF has no such lock-in period attached to it.
Investor can redeem or sell their ETFs any time they please at the prevailing market price.
ETF is consider more liquid.
ETFs charge between 0.05 per cent to 1 per cent of the net asset value as expense ratio, which is much lower as compare to mutual funds.
Due to both MF and ETFs varied purchase and redemption criteria, both their tax treatment is quite different.
Experts say, both ETFs and MF come with their own set of pros and cons.
So an investor should properly understand these financial instruments before investing in them.
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