Compare mutual funds and exchange traded funds

Let us learn about mutual funds and exchange traded funds before understanding the differences between them.

Exchange traded funds

It is a fund which is traded on the stock exchange. Stocks and bonds come under exchanged traded funds. Price in the exchange traded funds varies throughout the day. Generally, fees in exchange traded funds are low and high liquidity.

Exchange traded funds are used in hedging, arbitrage and equitizing cash. Exchange traded fund shareholders get part of profit in terms of dividends and interest earned. In liquidation they get residual value.

In exchange traded funds, the following is applicable−

• No minimum investment is required.
• Broker fee is same as that for regular one.
• Transactions can be carried out in real time also.

Mutual funds

These funds are traded in diversified holdings. It includes bonds, stock, money market instruments or a combination. On behalf of investors, the fund manager manages these funds. It is the collective investment and risk is divided among investors. This is good for investors who are not sure which stock to buy or sell.

Based on investment it is categorized into pension, fixed maturity, growth, income, liquid and tax saving funds.

There is another categorization of mutual funds.

• Equity funds − It depends on the type of stocks (large, mid, small & multi cap companies).
• Debt funds − They are categorized according to maturity tenure (short, medium & long term bonds).
• Hybrid funds − Mix of equity and debt.

Differences

The major differences between mutual funds and exchange traded funds are as follows -