How are ETFs different from active mutual fund schemes?

We have all heard how exchange-traded funds, popularly known as ETFs, are gaining ground as one of the preferred investment avenues in the country.

Much like other mutual fund schemes, ETFs offer a simple and diversified approach to investing. Both provide for a basket of various assets like equities and debt or commodities like gold and silver. So, it is natural to feel confused between various investment vehicles.

This blog attempts to highlight the key features of active Mutual Fund schemes and passive mutual fund schemes like ETFs so that you can make informed investment choices.

Difference no. 1 – Typically, ETFs track a particular benchmark index and are generally passively managed funds. Meaning the fund manager plays a passive role as the allocation decisions are driven by the benchmark index, and the fund manager needs to merely replicate the same, subject to tracking error.   On the other hand, most categories of mutual fund schemes like Equity, debt and hybrid funds are actively managed schemes that involve the research and expert analysis of fund managers for managing the scheme’s portfolio with an aim to generate long-term capital appreciation.

Difference No. 2 - ETF prices can fluctuate at varied times during the day, allowing investors to purchase or sell them at any time of the day, subject to the availability of the seller or buyer. At the same time, the price of Mutual fund units is measured by its NAV (Net Asset Value), which is calculated at the end of each business day and can differ on day to day basis.

Difference No. 3 - ETFs can be purchased and sold at any given time during trading hours on the stock exchanges and generally do not follow a minimum lock-in period norm, like various other mutual funds schemes like, say, ELSS. Investors holding mutual fund schemes are generally advised to hold on to investments for the long term. However, many funds offered by mutual funds can also be suitable for investors looking to invest for a short duration.

Conclusion: Investors should investigate both ETFs and actively managed mutual fund schemes as a possible avenue for investment. As widely advised, the investment decision should be based on the financial goals and the risk appetite of the investor.

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These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions. Investors may consult their financial advisors and/or tax advisors before making any investment decisions. Investors should read the Scheme information documents carefully before making any investment decision. Investors should make any investment decision basis their investment objective and after considering their risk appetite.

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