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Mutual Fund and ETF: How do they differ?

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05 May 2023

What’s the secret to long-term investment success? It all depends on diversification—that is, whether you have the right mix of assets. If you’re looking to diversify your portfolio, mutual funds and exchange-traded funds (ETFs) could help.

What is mutual fund?

In a mutual fund, money is collected from investors and invested in various asset classes. Equity funds, debt funds, and sector funds are examples of different types of mutual funds .

What are ETFs?

ETFs also use pooled funds. Here, the shares of different companies are accumulated to form the asset base. These assets are categorised into different units and traded on the stock exchange.

Mutual fund vs. ETFs

Active and passive management

Portfolio managers actively manage mutual funds. They use market research and investment strategies to outperform the market.

ETFs are passively managed. They follow a market index and try to match its performance.

Liquidity

Settlement of mutual fund investments takes place at the end of a trading day. If you are concerned about liquidity, consider investing in ETFs. Trading of ETFs takes place throughout the trading day.

Investment procedure

You can buy mutual fund units from the fund provider. In contrast, ETFs are traded on the stock market just like other stocks. You can buy them from traders.

Cost

Mutual funds involve higher fees than ETFs. If cost is a concern, ETFs may be a better option.

Protection

Mutual funds tend to be safer than ETFs. That is because mutual fund managers offer downside protection in a bad market.

Which is better?

Both mutual funds and ETFs have their advantages. But mutual funds are managed by professionals who try to beat the market. This gives them an edge over ETFs.