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ETF v/s Mutual Funds: Which Suits You the Most?

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ETF v/s MF

The recent ad on ETFs in IPL has sparked a conversation amongst investors about a relatively new investment vehicle. People want to know what are ETFs and how are they different from Mutual Funds. We are here to solve this problem for you by helping you figure out if “Mutual Funds Sahi Hai” works for you, or not!

Exchange Traded Fund (ETF), ETF meaning?

An ETF (Full Form: Exchange Traded Fund) is a type of mutual fund which is passively managed. An ETF helps an investor gain exposure to the market returns. The ETF tracks the broad underlying index like Nifty or NASDAQ or CPSE and carries a diversified risk associated with the index. For eg., a Nifty Midcap ETF tracks the performance of the Nifty Midcap stock index and includes all the stocks consisted in the index in exactly the same weights. Unlike Mutual Funds, ETFs are listed on stock exchanges and can be traded anytime like stocks. You can read more about ETFs here

What are Mutual Funds?

How Mutual Funds work? Mutual Funds are actively managed portfolios, and unlike ETFs, Mutual Funds can not be traded throughout the day. One can invest in Mutual Funds in India by buying the fund at the end of the day using the ending Net Asset Value (NAV). Mutual Funds make their investments based on the research done by the team. Their main objective is to beat the market. How to sell Mutual Funds? Mutual Funds can be sold back to the fund house at the current NAV after the initial lock-in period is over.

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Key Differences Between Mutual Funds and ETFs:

Major ETFs in the Market:

Even though the ETF in India is currently in its infant stage, ETFs have performed well in the recent past. Some of which include:

SBI NIFTY 50 ETF (SETFNIF50)

SBI Nifty 50 ETF tracks the performance of the Nifty 50 index. The portfolio consists of all Nifty 50 stocks in the exact same weight as defined by NSE. Since the weights do not change, The ETF doesn’t require active churning, and hence it is passively managed. The ETF has given an annualized return of 13.78% over the past 5 years.

Source: Google Finance, Tavaga Research

Motilal Oswal NASDAQ 100 ETF

ETFs can be a good way to get exposure to equities outside India as well. The Motilal Oswal NASDAQ 100 ETF tracks the performance of the NASDAQ 100 based on the stocks in the USA. The ETF has an annualized return of 32% over the past 5 years, and has outperformed almost all Mutual Funds out there.

Source: Google Finance, Tavaga Research

Apart from equity ETFs, there are some commodity ETFs also like SBI gold ETF or Nippon Gold ETF. The Gold ETFs have Gold futures as the underlying for their performance. These ETFs let investors gain exposure to the commodities with minimal expense ratios and zero storage costs.

Mutual Funds or ETFs? What is the Right step?

The right choice between ETFs and Mutual Funds depends on a multitude of factors like holding period, investment horizon, risk taking capacity, tax benefits, etc. Here we will try to advise you on what we think is the right way to choose between the two.

For an investor who prefers large-cap or Blue-Chip funds, ETFs are a better choice than Mutual Funds. Large-Cap funds invest in equities that have a large market capitalization. Such scrips have already passed the growth stage and now in the mature phase of their business cycle. And hence, investing in these stocks or funds is associated with stable growth and less volatility.

Such Large-Cap funds rarely beat the market by a significant percentage, and it’s better we save on the expense costs by investing in broad Market Index ETFs rather than mutual funds. The advantages are in terms of lesser risk, lower expense ratio, higher diversification, and no dependence on the ability of the mutual fund manager.

For an investor who prefers mid or small-cap high-growth stocks, Mutual Funds will be more appropriate to suit their risk-return objectives. Such investors can benefit from the expertise of the mutual fund manager. Mid-Cap or Small-Cap mutual funds are churned on a more regular basis, unlike Mid-Cap or Small-Cap indices which stay the same for 6 months or more. The high risk and high returns provided by such funds offset the expense costs and manager fees that these funds charge.

Disclaimer: The above write-up is meant for informational and educational purposes only. Kindly do not consider this as a recommendation to buy or sell the ETFs or Mutual Funds.

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