Exchange-traded funds are baskets of securities, much like mutual funds. Unlike mutual funds, ETFs are bought and sold throughout the day. That gives buyers and sellers more control, whereas mutual fund orders are only processed after the market close, based on the day’s final prices.
The Growth of ETFs has been volatile. In 1990’s there were just 29 and near to end of 2016 there were 1,700 investing in various stocks and bonds and other securities.
ETFs and Mutual funds are a lot in common. Both of them pursue a specific investment goal. Both offer diversification also both manage costs but depending on their investment objectives.
What are the structural differences?
Mutual funds accumulate a pool of money and invest to pursue objectives stated in fund’s prospectus. All the resulting work is professionally managed by an investment company.
In ETFs an investment company creates a new company which pursues a specific investment objective. The investment company sells the shares in this new company.
Mutual funds are not listed on stock exchange & can be bought and sold through any channel.
ETFs are listed on stock exchange and are sold by broker dealers.
Most of Mutual funds are priced at the end of the trading day.
ETFs are priced continuously throughout the day. They may trade at a premium or a discount & it can fluctuate based on investor’s interest in security
What are the Tax differences?
Mutual funds are allowed to trade securities hence they may incur a capital gain or loss and generate interest income or dividend for its shareholders.
In ETFs, when you sell security you shall owe taxes on any capital gains.
For a Glance look at the chart below-
If both the Mutual fund and ETFs are included in your portfolio you may be benefited. To determine the best fund for your portfolio in-depth knowledge may require.
Mutual funds and EFTs are subject to market risks. Please read the scheme related documents carefully.