Mutual Funds vs. ETFs: Which Are Better?

Investors often face multiple financial options for putting their money for wealth expansion. One such aspect is choosing between Mutual Funds and Exchange Traded Funds (ETFs). In the Australian market, the investor may face a dilemma between choosing in managed funds by PM Capital, Prime Value Asset Management, Westpac Financial Services or Russell Investment Management on the one hand or invest in iShares MSCI-Australia ETF, WisdomTree Australia Dividend Fund, Franklin FTSE Australia ETF or First Trust Australia AlphaDEX Fund.

Mutual funds are investments funds managed by highly experienced professionals wherein a large number of investors (both retail and institutional) invest in a diversified pool of securities (stocks, bonds or commodities) for a safe return. Mutual funds provide advantages of diversification, liquidity, reduced transaction costs, flexibility, and professional management. While, tax inefficiencies, poor trade execution, investor’s fund evaluation incompetency, lock-in periods and dilution of profits, are some of the downsides associated with this investment tool.

On the other hand, ETFs are liquid financial instruments which track a stock index or assets. ETFs trade on a stock exchange with prices fluctuating throughout the day. ETFs gives a portion of profits to their shareholders. They offer advantages of lower costs, portfolio diversification, risk management, and tax benefits. While lower dividend yields, possibly higher costs, intra-day share price fluctuations are some of the pain areas for the investment option.

ETFs offer greater flexibility to market participants with characteristics similar to those of stocks, meaning investors can make a trade on ETFs and their price always fluctuate. However, investors can buy or sell Mutual Funds at the end of the trading day after the market closes base based on Net Asset Value. ETFs disclose their holdings on a daily basis, but mutual funds disclose their holding details and performance on a quarterly or semi-annual basis. Mutual funds provide options to the investors so that they don’t have to invest a lot of money at once, but still, there are lots of mutual funds which requires high initial investment requirements. Investors get relief while investing in ETFs as they can buy a single stock. That means investors do not need the fortune to invest in the market.

While there are some expensive actively managed ETFs, mutual funds are far more actively managed than ETFs. Some other benefits offered by ETFs over Mutual Funds are a large variety of the funds provided by different fund managers based on investment criteria, asset type and risk tolerance, efficient and professional support services offered by fund managers, lack of commission fees and automatic investment plans.

Investors must do thorough research while selecting between a mutual fund or ETFs. Deploying sound judgment based on their financial goals, market participants may enjoy enhanced payoff over medium to long term rather than investing in real estate or keeping the fund ideally in banks.


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