How is ETF Different From Mutual Funds?

How is ETF Different From Mutual Funds

Mutual funds India offer variety of mutual fund schemes which can be categorized into two – Actively managed mutual fund schemes and Passive mutual funds.

ETF or exchange traded fund are passive funds. The actively managed mutual fund investment is popular with retail investors as they are older than passive funds and also because, investors can do investments through SIP. However, ETFs are gaining popularity in India due to its simplicity, low cost and wide range of investment offerings. Not only one can invest in broad market indices like Nifty and Sensex, one can also invest in Gold ETFs or market cap based ETFs like large cap, midcap, small caps, sectoral ETFs, liquid and few varieties of debt funds through exchanged traded funds.

Exchange traded funds or ETFs is the fastest growing category of mutual funds in terms of Assets under Management (AUM). As per AMFI September data, ETF AUM was more than Rs 4.5 lakh Crores (as on 30th September 2022). Though a large percentage of ETF AUM belongs to institutional investors, the interest of retail awareness is also growing in exchange traded funds.

Today, we will discuss the difference between the ETF mutual fund and actively managed mutual funds.

How are they invested – You can invest in ETF during the trading hours and just like any other share, you can invest in it on the price prevailing at the time of trade. On the contrary, though, investment in active mutual fund schemes can be done anytime during the day, but the price, known as mutual fund NAV is declared at the end of the day. Basis the NAV, units are allotted to you at the end of the day.

How to start a SIP – investments through SIP cannot be done in ETF, whereas SIP is the most popular way of investing in actively managed mutual fund schemes.

Declaration of NAV – Both, ETF and actively managed schemes NAVs are declared at the end of the day after the market closures. But in case of ETF, the NAV applied is the rate at which you buy the units during the trading hours.

Demat account –To buy an exchange traded fund, having demat and trading account is must. Actively managed funds can be bought in demat accounts as well as through non-demat way.

Fund management – As ETFs are managed passively, the fund manager tries to replicate the Index return it is benchmarked to, whereas the fund manager of an actively managed mutual fund investment always endeavours to beat the fund benchmark.

Cost – Fund management charges for ETFs are very low compared to actively managed mutual fund schemes.

Minimum investment – In case of ETF, the investor has to buy one unit minimum. The minimum amount for an active fund can be Rs 5,000 excepting ELSS mutual fund schemes where the minimum investment amount is Rs 500. Some AMCs may even allow investments with an amount as low as Rs 100.

Taxes – Taxes are same for ETF and active managed mutual funds.

In this article we compared the active and passive mutual funds. The growth of exchange traded funds have been phenomenal in the last 3 years in India. This growth can also be attributed to huge growth in number of new demat accounts opened during the same period. If you do not have a demat account, do open one and starting investing in ETF with the help of a financial advisor or your mutual fund distributor.

How is ETF Different From Mutual Funds?

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