By RACHIT KUMAR
When was the last time you were thinking of investing your money and you didn’t have a Mutual Fund Advertisement in your mind saying ‘Mutual Fund Sahi Hai’, not a long time ago right? That advertisement has always been over our minds when we think of investing our money. Mutual Funds started trending in India after some television commercials showcased how you can earn more return in investing in mutual funds than investing in fixed deposit account. Inflows in Mutual Funds have sharply risen over the previous decade because everyone wants to put their money into work with less risk because putting money in one single stock and it falling will directly erode your wealth. With changing times, we see new things and that is how we are seeing people first moving from stocks to mutual funds and now to ETFs (Exchange Traded Funds) while there are limited Exchange Traded Funds in India right now but they have started trending now but what is causing all this? We will figure this out in this article! We need to first find the key differences between mutual funds that are causing all this. Let’s Start-
1) Actively Managed or Passively Managed
Mutual Funds are both actively managed and passively managed. Index Mutual Fund Schemes are passively managed because they do not require changes as they replicate the index like Nifty 50 or Sensex while there are mutual funds schemes that are actively managed by the fund house manager.
2)Liquidity
Mutual Funds require 1-3 days to convert into cash as first you will determine the net asset value of the mutual after the closing of the stock market then you place your order to sell back to the fund house and the fund house will process this in one-three day.
Whereas
Exchange Traded Funds are highly liquid as they are traded on stock exchanges. They can easily be sold off on working hours of stock exchange hence they are highly liquid.
3) Determining of Net Asset Value
Mutual Funds net asset value is determined after the closing of the stock market as the value of mutual funds is dependent on the value of various stocks hence after having the closing price of all the stocks the net asset value of the mutual fund is derived.
Whereas
Exchange Traded Funds are directly traded on the stock market hence their value is available in real-time to the investors. You don’t have to wait for the market to close to determine the value of Exchange Traded Funds.
4)Expenses
Mutual Funds attract 1-2% of the expense ratio which is given to the fund manager who manages your mutual fund. The expense ratio varies from scheme to scheme, if you go for an index fund scheme then there is a less expense ratio as it is a passively managed fund hence expense ratios vary. Do check your expense ratio before buying any mutual fund schemes. The expense ratio usually ranges from 1-2% and if you are investing in growth plan then this impacts your earnings at a great level. If you are withdrawing your money before the completion of your SIP plan then you have to bear the cost of exit load which is different for different schemes.
Whereas
Exchange Traded Funds attract an expense ratio between 0.3-0.6% which is much less. There is no exit load, no agent commission in buying Exchange Traded Funds.
ETFs just replicate some indices or some commodity depending upon which ETF it is but sometimes they do not always follow the trend sometimes there is more increase in the index but we will see less increase in the net asset value of ETF and Mutual Funds directly reflect the changes in which they are invested hence seeking the viewpoint which one of would replicate the best in terms of increasing and decreasing so than mutual funds are the top choice for the investors. Stock Market is full of ups and downs hence if are you are having a SIP in mutual funds or ETFs continue them in the downfalls and as well in the rise of markets and with longer investment period you will surely get good returns from both Exchange Traded Funds and Mutual Funds as well. The decision always lies with investors just keep all the above things in mind and your wise decision. Happy Investing!!
AUTHOR
Rachit is a student of Kirori Mal College,DU. Currently pursuing B.Com(Hons). He has a very keen interest in finance and loves to research about stock market whole day. He has his own start-up which is empowering young minds to learn about financial knowledge. He is nothing but the best we can have. We are just too lucky to have him in our team.
Disclaimer: The views expressed in this article are the author’s own and do not necessarily reflect the views of the organization.
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