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Apply NowExchange-traded funds (ETFs) and mutual funds are popular investment instruments that seem similar. They’re less volatile than stocks and can help create long-term wealth. However, the two have significant differences, and you should know about them before investing. This article walks you through exchange-traded funds and mutual funds and how they differ.
An exchange-traded fund is a basket of securities investors can trade, just like a company's share. ETFs are popular and valuable because they're offered in all asset classes, including commodities and currencies. An ETF's price changes daily as it is traded live on stock exchanges. They're also of several types, with a few of them listed below:
Equity ETFs track indices like the NIFTY 50. The price of an equity ETF is determined by its underlying index’s movement, which is why it keeps changing daily.
Bond ETFs are a combination of debt instruments. They track fixed income instruments such as debentures and government bonds.
Thematic exchange-traded funds track the performance of a particular industry. They are also called 'Sectoral ETFs' since they replicate the performance of a particular sector.
Commodity ETFs are among the most popular ETFs in India. Gold ETFs and silver ETFs are the two commodity ETFs available in India.
If an investor wishes to invest in foreign companies directly, they can invest in international ETFs. An international ETF tracks the index of a specific country or region.
A mutual fund is a pooled investment that collects money from various investors and invests it in securities like stocks, bonds, and other assets. Depending on the criteria of classification, mutual funds can be divided into many types.
A mutual fund scheme that is available for subscription and redemption throughout the year is called an open-ended mutual fund.
In a close-ended mutual fund, the mutual fund units can only be purchased during the initial offer period. These units can later be redeemed at the maturity date.
An actively managed mutual fund is managed by a fund manager who decides which stocks to buy, sell, or hold. These decisions are based on the fund manager's professional judgment and are backed by analytical research.
These mutual funds aren't managed by a fund manager. A passively managed mutual fund track's the scheme's benchmark index.
Based on asset class, mutual funds are further divided into four major types.
Equity mutual funds invest in stocks. The risk and reward in equity mutual funds are high.
Debt mutual funds invest in debentures, bonds, and other fixed income assets. They’re comparatively safer than equity mutual funds.
Money market mutual fund invests in liquid instruments. Investors looking to park their surplus funds in a low-risk investment instrument can invest in a money market mutual fund.
A balanced hybrid mutual fund invests in a mix of asset classes, maintaining a certain percentage between equity and debt. In this way, the risk and returns are balanced.
ETFs and mutual funds have fundamental differences. We've listed a few of them below:
The decision between ETFs and mutual funds depends on your investment strategy and risk appetite. Both investment vehicles offer unique benefits to help build wealth. You can invest in them consistently to achieve your investment goal. If you’re investing in mutual funds through a Systematic Investment Plan (SIP), you can use IDFC FIRST Bank’s SIP calculator. It can help you plan your investments and reach your goal faster.
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirstbank.com for latest updates.