How do ETFs differ from mutual funds?

When it comes to building a portfolio, one of the most common questions investors ask is whether they should invest in ETFs or mutual funds. Both of these investment options allow you to invest in a diversified portfolio, but they differ in important ways. Here's a simple guide to help you decide which one might be right for you.

What Are ETFs and Mutual Funds?

ETFs (Exchange-Traded Funds) and Mutual Funds are both types of investment funds that allow you to diversify your investment across different assets. However, they operate quite differently:

• ETFs: ETFs are traded on the stock exchange like individual stocks. You can buy and sell them throughout the day at market prices. Most ETFs track an index, like the S&P 500, and are passively managed.
• Mutual Funds: Mutual funds are bought directly from a fund company at the net asset value (NAV) at the end of the trading day. These funds can be actively or passively managed, with active management involving professional fund managers making buying and selling decisions for the fund.

ETFs vs Mutual Funds: Key Differences

Here’s a breakdown of the key differences between ETFs and mutual funds:

• Trading: ETFs are traded like stocks, meaning you can buy and sell them during market hours. Mutual funds can only be bought or sold at the end of the day at the NAV price.
• Fees: ETFs generally have lower fees since they are passively managed, whereas actively managed mutual funds usually charge higher management fees for the professional oversight of the portfolio.
• Investment Strategy: Most ETFs track an index, so they don’t require much active management. Mutual funds can be either actively managed (where fund managers choose investments) or passively managed (tracking an index like an ETF).
• Liquidity: ETFs are highly liquid, as they can be bought and sold anytime during market hours. Mutual funds, however, have limited liquidity because they are priced at the end of the day.
• Minimum Investment: Mutual funds often require a minimum investment, which can range from a few thousand rupees to a few lakhs. ETFs, on the other hand, can be purchased in small increments, making them more accessible.

Which One Should You Choose: ETFs or Mutual Funds?

Deciding between ETFs and mutual funds depends on your investment goals, time horizon, and preferences:

• Choose ETFs if: You want a low-cost, flexible option with the ability to trade throughout the day. ETFs are ideal for those who prefer passive investing and are comfortable with managing their trades.
• Choose Mutual Funds if: You prefer professional management, don’t mind paying higher fees, and are looking for a long-term, hands-off investment. Mutual funds are better for investors who want someone else to manage their money for them.

Both ETFs and mutual funds are great investment options, and your choice depends on your individual goals and preferences. If you’re looking for lower fees and the ability to trade anytime, ETFs are the better choice. If you prefer professional management and don’t mind paying higher fees, mutual funds might be a better fit for you.