Difference between ETF and Mutual Fund

What is an ETF?

An Exchange Traded Fund (ETF) is an investment avenue that allows investors to put in their money to receive units that can be traded on a stock exchange anytime during the trading hours.Ability to trade its units in stock exchange differentiates ETF from Mutual Funds.

While in a mutual fund units can be redeemed at any time at the present net asset value, ETFs units can be redeemed only via a sale on the stock exchange when there is a corresponding buyer. So, when you sell your mutual fund units, the units go back to the fund house which is then available for any prospective investor to buy but an ETF unit sale doesn't mean a return of units to the fund house but rather to an interested buyer.

ETF v/s Mutual Funds

Things to know while investing in an ETF

• Exchange Traded Fund possesses the features of both a mutual fund and a stock.
• Just like mutual funds, ETFs perform based on the performance of the basket of stock/ commodities that are comprise the fund.
• ETFs do not have an NAV that is calculated at the end of the day as in the case of mutual funds. The value of ETF units keeps changing constantly as and when they are being traded just like share on the stock exchange.
• ETFs are traded on the secondary market only i.e. stock exchange.
• ETFs investments require investors to have a Demat and a trading account.
• Contrary to mutual fund investments that can be made by directly buying from the fund house, ETFs can be bought only via a broker just like a stock investment.
• Every ETF transaction will end up in paying some commission to the broker.
• ETFs are usually created with a sector or an index as the base like an index based mutual fund.
• ETFs are cheaper because they are not actively managed but left to perform based on the underlying sector or index performance.
• There is no fixed structure for an ETF as it varies across different countries and among different fund houses within a country.
• ETFs in certain countries attract tax savings while in some they are still at a nascent stage. So it is better to do your basic research and seeing the benefits of the investment before investing.

Read More:
Uncommon Myths about Mutual Funds Busted
20 Things to consider while investing in mutual funds
When to exit from a Mutual Fund Investment

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