Mutual Funds Vs ETFs

Both mutual funds and exchange-traded funds are pooled investment instruments. While mutual funds are managed actively, ETFs are managed passively. Mutual funds are handled by professionals, whereas ETFs replicate an underlying securities index.

Mutual funds have a minimum investment requirement. They are sold or purchased directly from mutual fund companies. The purchase and sale of ETFs, on the other hand, are channelized through brokers. ETFs are traded in the secondary markets and have no minimum investment limit.

Mutual funds vs ETFs, head to head comparison is as follows:

Mutual fund managers actively manage investments. Mutual fund houses collect money from various small investors—the accumulated sum is bundled into diversified securities, stocks, commodities, bonds, money market instruments, and short-term debts.

Mutual fund companies uniformly divide overall investment into small units. Then, depending on the contribution, investments are proportionately allotted to each investor. The funds are further classified into open-ended mutual funds and closed-ended mutual funds.

An Exchange Traded Fund (ETF) refers to a passively managed basket of asset stock exchange like equity. It includes assets, security commodities, currency, stocks, and bonds. It is available for short selling and margin trading. This is done in the secondary market.

Let us look at the Mutual Funds vs ETFs infographic for a better understanding.

Let us look at some mutual funds vs ETFs similarities. Both are similar investment schemes that put the investors' funds into a securities bundle. They offer similar returns and risks which depend on the underlying securities basket.

Moreover, these investment vehicles are governed by the Securities and Exchange Act, 1934; Securities Act, 1933; and the Investment Company Act, 1940.

Now, let us discuss mutual funds vs ETFs differences in detail:

1. Mutual funds are accumulated from various investors. On the other hand, an ETF is traded on the stock exchange.
2. Mutual funds are managed actively. ETFs function passively—by tracking the performance of the underlying securities index.
3. Mutual funds are purchased directly from a company; Investors exchange ETFs in the secondary market by employing a broker.
4. The trading structure of mutual funds is more complicated than the ETFs. Mutual funds require a trading account. They are restricted from frequent buying and selling.
5. Mutual funds have a higher expense ratio, ranging between 1.5% and 2.25%—ETFs have an expense ratio of 0.25%.
6. Most mutual funds have a minimum investment limit. In contrast, an investor can even buy a single unit of ETF.
7. Mutual funds involve fees for brokerage, sales commission, operation, and redemption. ETFs only require a broker's commission on transactions.
8. Investors can acquire mutual funds through SIPs, where a certain sum is automatically withdrawn from the investor's account and invested in the desired scheme. ETFs do not provide such a facility.
9. The current price of a mutual fund is determined at the end of the trading day. ETFs are subject to real-time pricing.
10. ETFs are more efficient when it comes to taxes. Gains from mutual fund sales are taxed separately, whereas ETF sales just get added to the individual's taxable income.

This has been a guide to Mutual Funds vs ETFs. Here we discuss difference between Mutual Funds & ETFs & compare their performance to find which is better. You may also take a look at the following articles for further details –

• ETF - Full Form
• Compare - ETF vs Index Funds
• Mutual Fund Analyst
• Types of Mutual Funds