People can apply for different investment models that give them a secondary income source to depend on. Some of these types are relatively similar from the surface level, like mutual funds and ETFs.
These types of financial devices involve investors pooling their money into a specific collection of securities. The investment participants do not monitor their assets- a joint fund manager handles all management-related activities.
However, while they have some similarities, both types are suitable for specific investors. Study the options well to decide which works for your personal requirements.
What are Mutual Funds?
Mutual funds are a type of financial solution with a relatively high requirement for minimum investment, specifically when compared to ETFs. The size of the minimums depends on the fund type and the leading company.
Fund managers oversee most types of mutual funds, individually or as a team, depending on the fund size and primary client type. They typically choose which stocks or assets to buy/sell within the mutual fund for the best profit potential.
Moreover, the funds have a higher cost in most cases as a lot goes into managing one in terms of effort, time, and staffing.
Types of Mutual funds include:
- Open-ended Funds- These types of mutual funds typically have more assets and volume. Here, the fund share transactions occur directly between the fund company and investors. Fund managers can issue any count of shares. New investors can get issued new shares after they buy into a mutual fund.
- Close-ended funds- Mutual funds of a closed nature include a specified count of shares in the pool. Here, increased investor demands do not automatically imply issuing new shares. A fund’s price is set as per investor demand, not the fund’s NAV amount (net asset value).
What are ETFs?
ETFs or Exchange-Traded Funds are not as costly for investors at the entry position. Conventionally, big groups of institutional investors can create a personalized ETF. Here, the investors handle day trading of the shares, similar to the process on the stock exchange. Indeed, it is possible to sell the ETFs short, useful typically for long-term investors.
However, one thing to note is that the price of ETFs fluctuates multiple times in the market. So, arbitrage is possible since investors can trade the funds at prices not the same as the correct NAV.
Commonalities Between Mutual Funds and ETFs
Before discussing the differences that set the two apart, let’s tackle the similarities. Indeed, they seem similar in some ways, but this is typically from a surface-level perspective. These similarities include the following:
- The ability to diversify the portfolio with both.
- Reinvest the dividends.
- Save for long-term situations, like retirement.
- Access asset classes with similar features and fall under the same regulations, like currency, equities, commodities, fixed income, and real estate.
The Points of Difference Between Mutual Funds and ETFs
Now, let’s discuss the various points that set the two types of financial investment devices apart.
1. Type of Trading
Fund managers typically run the mutual fund transactions one time each day. After successful execution, investors get the same price within the same period.
On the other hand, ETFs are traded in the matter of stocks. To elaborate, investors buy and even sell ETF assets on the stock exchange. So, they notice the daily price fluctuations common in the volatile environment of the stock market. Essentially, all investors do not trade the ETFs at the same rate.
2. Management style
Investors who add their assets to mutual funds have two management styles. Here, they can operate indexed funds or use the active mutual fund. In most cases, investors interested in mutual fund types get actively managed mutual funds under the monitoring of trained fund managers.
In contrast, ETFs are more commonly managed in the passive management mode, relying mainly on index performance.
3. Minimum investment
The next point of difference between the two types is the minimum investment for each.
In the case of mutual funds, the minimum investment amount initially is USD 1 in most cases. This does not relate to the shared price in the fund. Plus, investors can purchase the fund in fixed dollar amounts or fractional shares.
Instead, ETFs have no minimum initial investment requirement since investors trade these assets as stocks. So, buyers purchase the ETFs in the form of whole shares at the price of only one share.
4. Efficiency of taxation
When investors sell securities from a set mutual fund, that will activate capital gains for all of the shareholders. The individual with an unrealized loss for the investment is also liable for this.
On the other hand, ETFs create lower capital gains as there is limited turnover in this case. Thus, it is possible to manage the tax through the holdings efficiently.
5. Overall costs
Another point of difference between ETFs and mutual funds is the cost types involved with both. In the case of the former, there are explicit and implicit costs.
Indeed, the ETF provider does mention the operating expense ratio, and the broker is transparent about the trading commission cost. Yet, verifying the premium/discount amount and bid/ask spread with NAV is essential.
These costs are available in the implicit type and are different from the ETF’s underlying holding value.
In contrast to that, it is possible to buy mutual funds with no trading commission. However, investors must pay the operating expenses and additional fees, like early redemption or sales load fees.
Why Reach Out to MoneyHelper for Guidance?
Now that you know the variations between mutual funds and ETFs, you can proceed with your selection process. Both types work for specific user bases with different buying styles and average expense ratios. Study all variations well to know which works for you.
However, if you still have doubts, you can refer to professional financial advisors for help, like the trained ones at MoneyHelper.
The team of experts at this company has years of practical experience and training in finance. Therefore, the professionals here can judge the diverse projects, benefits, and technologies to utilize for top-notch money management experience.
Need to plan a customized fund solution for tour professional and personal needs with proper guidance?
Reach out to the experts at MoneyHelper, as soon as you need!