Your investments are spread over various asset classes to avoid their dependence on one asset class and thus diversify your portfolio. Its main goal is risk reduction. Diversification can be achieved by investing in Exchange Traded Funds (ETFs) and mutual funds that invest in different securities of companies.
In the case of an ETF, it provides investment diversity through buying various securities from its index while a mutual fund obtains this by dividing money among several stocks. Thus, if there is a poor performance in one stock, others can compensate for it.
It is often said that professional investment advice makes all the difference when it comes to rates of return. More so during times of market turbulence, expert advice proves invaluable. Both ETFs and mutual funds are managed by professionals who have experience in investment and therefore make decisions concerning security selection, portfolio management and other related activities. These experts also keep on reviewing the ETF’s or the mutual fund’s performance so that they adjust their investment strategy as they may see fit. This long-term focus means experts can derive greater returns from markets after careful observation.
This is just another similarity between mutual funds and ETFs as both of them have NAVs which are calculated at the end of a day. They get their NAV from underlying securities.
The calculation process of NAV is similar for ETFs and mutual funds. The expertise involved in calculating a specific mutual fund’s or ETF’s NAV estimates the worth of individual securities and summates their values. Nonetheless, the NAVs keep fluctuating; they are not fixed.
In both mutual funds and ETFs, there will be choice to select from different investment options. Illustrated above, there are various types of these funds that one can think about investing for purposes of his/her finances. Based on your financial goals and risk appetite you may opt to invest in any fund or EFT that suits you most. You could pick up any mutual fund if you want to generate alpha.
Alternatively, if your aim is investing in stocks such that the fraction invested in each stock resembles an index, then go for ETFs. Stocks, bonds, fixed income securities and commodities are examples of asset classes where one can invest using either ETFs or mutual funds.
| Differences | ETF | Mutual Fund |
|---|---|---|
| Trading And Liquidity | ETFs are traded on the stock exchange like any other stock, making them more liquid. | Mutual funds can only be bought or sold at the end of the day at the NAV price. |
| Expense ratio | ETFs have lower expense ratios. | Mutual funds have higher expense ratios. |
| Investment Approach | ETFs are passively managed, which means the fund mirrors a particular index, making them less risky and transparent. | Mutual funds are actively managed, which means fund managers invest in securities based on their analysis and market outlook. |
| Minimum Investment | ETFs allow investors to start with smaller amounts. | Mutual funds typically require a higher minimum investment. |
| Tax | ETFs are more tax efficient as they have a lower capital gains tax. | Mutual Funds are less tax efficient. |
| Diversification | ETFs offer more targeted investments that mirror a particular index. | Mutual funds offer more diversification options and exposure to a broader range of securities. |
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