ETFs vs. Mutual Funds: 5 Factors to Consider Before Choosing
Investing in your future is one of the most important decisions that you make for yourself. There are so many options available in the stock market. Most of them are presented with a good number of alternatives to ensure that your investments bring about desirable returns and meet your financial targets.
Mutual Funds and ETFs are the two most popular investment options that are readily accessible to investors in India. To a certain extent, they seem to be the same. However, when we dig in depth, they are different. To invest in mutual funds online or ETFs online, this article will help you.
Lock-in Period
ETF investors are free to sell their investments whenever they choose, and there is no minimum holding period. Mutual funds schemes like Equity Linked Savings Schemes (ELSS) have a three-year lock-in period. It is not easy to liquidate the investment during this period.
This lock-in period can vary according to the mutual fund plan that is selected. This needs to be considered.
Fees and Expenses
Fees and expenses have a huge influence on your investment performance in the long run. In terms of expense ratios, ETFs generally offer lower rates than mutual funds. This is so because mutual funds mostly involve active management that costs more.
ETFs are usually managed passively and track a specific index. Before selecting, make sure that you consider the expense ratios and any other hidden costs associated with each option.
Tax Implications
Tax implications are another important factor to consider. In general, ETFs are more tax-efficient than mutual funds. This is a result of ETFs’ special structure, which minimizes capital gains distributions by enabling in-kind redemptions.
Mutual funds, especially those which are managed actively, have the potential to produce capital gains that are distributed to shareholders and could lead to tax obligations.
Flexibility
ETFs, like individual stocks, trade on an exchange all day long. This means that whenever the exchange is open, you can buy and sell them at market prices.
On the other hand, mutual funds are traded at the end of the day, and the price at that point is decided by the net asset value (NAV). ETFs might suit your investing plan better if you value the flexibility of intraday trading.
Commissions
In ETF transactions, Investors have to pay a fee on the sale and purchase of each unit under the current regulations because ETFs are traded on the exchange just like any other share.
On the other hand, there are no commission-required fees charged on the sale or purchase of mutual funds if they are direct investments.
To determine which is best for you, it is important to consider your personal preferences, investment goals, and financial circumstances.
The Bottom Line
It is a difficult task to decide which investment option to choose for your investment journey. There are many benefits and unique features to both mutual funds and ETFs. You can make a well-informed decision based on your investing goals and approach by carefully considering the above-mentioned factors. To invest in ETF online or mutual funds online, consider opening an account with Dhan.