Mutual fund vs ETF: Performance, pros and cons, how to invest

(Last Updated On: June 27, 2017)

Mutual funds vs ETFs is a debate going all over the world especially in the United States. In this post, we have a look at mutual fund vs etf performance, performance and how to chose one over the other.

In last few years actively managed mutual funds have not been able to outperform passive index funds. This has called into question high fee mutual funds charge. Current mutual fund fee in United states is about 1 %.  While the passive funds charge about 0.05%.

A similar debate has also started in India on whether ETFs can challenge and replace Mutual funds. Let’s first understand both investment options.

Exchange Traded Funds aka ETFs.

ETFs are a class of security freely traded in the market.ETFs are pegged to or track a particular index, commodity or some other asset class in the market.ETFs are traded on the stock market like a common stock. ETFs as they are freely traded behave like stocks and hence have fluctuating prices.

Mutual Funds

Mutual funds are actively managed investment schemes which pool together money from individual investors. Which in turn is invested in securities as per the objectives of the scheme.Based on objectives of the scheme mutual funds can choose to invest in equities, debt securities or a combination of the two.In India, mutual funds are legally structured as trusts. Investors are allotted mutual funds units against their investments. The price of the unit popularly called as NAV is decided every day at the end of the market.

Mutual fund vs ETFs ( Comparison)

ETFs are low-cost passive investments which require a trading account to invest. Price discovery happens dynamically in the stock market. Mutual funds, on the other hand, are actively managed investments which can be directly bought from the fund house. Because of active management, mutual funds have a higher fee and in some cases also levy exit charges. There are no entry or exit charges for ETFs.

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The mutual fund’s transaction price is the end of the day NAV. ETFs on the other hand have dynamic trading price as the transaction price.You would need to have a trading account to invest in ETFs while mutual funds can be directly bought from fund houses and hence do not require a trading fund.

The mutual fund’s transaction price is the end of the day NAV while ETFs have dynamic trading price as the transaction price.You would need to have a trading account to invest in ETFs.  Mutual funds can be directly bought from fund houses and hence do not require a trading fund.

 Mutual FundETF
ManagementMutual funds are actively managed funds ETFs are generally track an index and hence they are passively managed
Fees/ExpensesMutual funds have high fee can range from 1% to 3% ETFs have lower fees can vary from 0.1 % to 0.2 %
Price DiscoveryPrice discovery happens at the end of the day.Price discovery is dynamic
Entry/Exit FeesThere are exit fees for mutual funds in IndiaNo entry or exit fees
TransparencyThey disclose holdings at the end of the quarterDiauly disclosure of holdings
Transaction PriceDaily NAV is the transaction priceTransaction price is the current traded price
Trading AccountNo trading account is required to buy mutual fundsA trading account is required to buy the mutual fund
Brokerageyou do not pay brokerage fee as no trading account is involveda brokerage fee needs to be paid for every transaction

Mutual funds vs ETFs in India

  1. Mutual funds have generally performed index ETFs in the market.
  2. There are no extra tax incentives for ETFs as in US market hence lower popularity
  3.  Low fees in ETFs means not may people are interested in distributing ETFs in the Indian market.
  4.  The breadth of ETFs available in Indian market is very low.
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For more details  read my post on 7 reasons why ETFs are not popular in India

Further Readings

  1. Reason why ETFs are not popular in India
  2.  CPSE ETF All you need to know

 

2 Comments

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  • You are absolutely right ETFs and passively managed funds are popular in US due to higher fees and tax advantages that ETFs enjoy. In India, on the other side Mutual fund management fees as compared to alpha they produce in terms of returns is much higher than US and there are no special tax incentives for ETFs hence mutual funds are still popular but this will change with time.

    Sarab 4 months ago Reply


  • I dont know about developed countries but ETFs are very popular in US. Mutual funds on the other hand just suck the money with a lot of fund management fees. This way ETF is better than Mutual Fund in US.

    James golith 4 months ago Reply


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