ETFs Vs Mutual Funds

ETFs Vs Mutual Funds

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ETFs Vs Mutual Funds

An Exchange Traded Funds (or ETF) is an investment instrument traded like stocks. An ETF holds assets such as stocks or bonds and trades at about the same price as the net asset value of its underlying assets during the trading day. Most ETFs track an index like the S&P 500 or MSCI EAFE. ETFs May be attractive as investments because of their low cost, tax efficiency, and stock-like features.

Here are few advantages of the ETFs when compared to the Mutual Funds.

1. Tax Benefits
The major benefit an ETF over a mutual fund is the tax advantage. ETFs do not incur capital gain taxes when the funds are sold. Whereas in Mutual Funds, capital gains taxes are incurred as the shares within the Fund are traded during the life of the investment.

2. Simplicity
When you buy or sell an ETF, it is done at a price of a single transaction. You are trading away from the opening or closing a position. With mutual funds, shares in assets are constantly being traded to hit a target price and seek a preferred performance. Multiple trades will cause multiple prices.

3. Cost-Effectiveness
ETFs tend to be more cost-effective when compared to the Mutual Funds because of its simplistic investment. There would be large management fees in the Mutual funds because Shares in the Mutual Fund are actively traded and actively managed. Hence Fund Managers will charge for the time and efforts. Whereas in ETFs, it's just single transaction. This cuts down the fees and commissions.

4. Investing Flexibility
Since ETFs are traded on the stock exchange, they are available to investors any time during the trading hours. So investors can buy and sell units of an ETF on a real time basis, unlike regular Mutual Funds, which can be transacted only at end-of-day NAV. With more and more ETFs are getting launched, the investors have more choice to target a specific strategy. There are different types of investors for ETF, tracking the performance of an index or to achieve a specific financial goal may be more feasible than in a mutual fund.

5. Transferability
The problem arises in case of Mutual Funds when the managed portfolio is transferred to a different investment company. There are possibilities of closure of the fund positions before a transfer can take place. This is a major problem for Mutual fund investors. This will also result early capital gains, increase commissions and fees and may also increase the risk. In case of ETFs the transfer is smooth and simple when transferring the investment funds. Hence ETFs are considered to be the portable investment.