Exchange-traded Funds Vs. Mutual Funds

Exchange-traded Funds Vs. Mutual Funds: A Look at the Differences

The comparison between exchange traded funds and mutual funds presented in this article will help you make an informed choice between the two.
WealthHow Staff
Last Updated: Oct 6, 2017
Investing in funds has helped many people get decent annual returns over the years. The prime points of distinction between exchange traded funds and mutual funds are identified in the following lines.
Exchange Traded Funds (ETFs)
These are a type of index mutual funds with some added special features and characteristics. In ETFs, an index, commodity, or a group of assets is tracked and their aim is to generate consistent returns for the investors. They are bought and sold constantly and hence naturally experience a high degree of price fluctuation. The main reason why ETFs are recommended is the diversification offered by them.
The advantage that ETFs have over the mutual funds is tax benefits. Taxes incurred on ETFs are lower than that on mutual funds. The cost-effective nature and flexibility provided by ETF investments have made them a popular choice over the years. Index ETFs, bond ETFs, and commodity ETFs are the three prime types.
Mutual Funds
Mutual funds are a safer bet for investors who are wary of the stock markets and direct stock investing. Mutual funds can average out your risk by investing in different sectors of the economy.
When you approach mutual fund service providers, the nature of various schemes floated by the company is explained. You will be explained the role of fund managers and how returns are maximized with calculated decisions.
By considering ratings and reviews, you can take a final call on your investments. Mutual funds are systematic financial products which come in three types - high-risk-high-return ones, medium-risk-medium-return ones, and low-risk-low-return ones. You can choose any product, as per your risk-taking ability. To start with, retail investors can go with low-risk funds and then switch over to other funds as they become more confident about their investments.
Fund managers will be investing your money in stocks of performing companies. Predicting the company's future performance is slightly tough, considering the constantly changing business environment. However, this risk is reduced as the fund managers have the right to exit a particular company stock and invest in performers to keep up with the promise of returns to investors. Mutual fund companies will charge you for their services and you can expect a much better performance from them in times of market boom, fueled by strong economic growth.
This comparison must have helped you understand both these investment vehicles. You can opt for any one of them, by conducting detailed research and consulting your investment advisers.