How is an ETF different from a mutual fund?

There are many options for investors in the stock exchange market and it will need a proper detailing and educating of the prospective investor to enable him or her find his way through this crowd of options. The debate between exchange traded funds and mutual funds is age long and have drew diverse reactions from different portfolio managers. The bottom line that it will the preferences of the investor determines which of the funds fit him or her better , although exchange traded funds may offer added advantage.

SIMILARITIES

Before we delve into the differences between both funds, checking out their similarities will be helpful. One striking similarities between both funds is that, they are less risky than investing in individual stocks . This is because they come with an inbuilt diversification, as one fund can include many individual stocks so that if any of the individual stock is not performing fine, the other has a chance of doing fine. This mitigates the overall risk.

ETFs and mutual funds investments gives you are wide variety of investment options , either broadly in a total market fund or narrowly in a sector fund. These funds are managed and monitored by experts, having you the time and effort that would have been expended in individual stocks. More details. 

DIFFERENCES

Exchange traded funds trade throughout the trading day like stocks, while mutual funds only trade at the end of the day at net asset value (NAV) price. This means that any trading on a mutual fund will be effected after the close of the trading day and not the price when the trading occurred. This may not bother a long term investor but for a tactical investor whose goal is to better his entry and exit points as to make more return on investment, it’s a big deal. This also means, that incase of any major trading event e.g black Monday, you can sell the ETF immediately for its price right then as opposed to getting the end-of-the-day value for the mutual fund.

ETFs are tax efficient because they don’t suffer from the embedded capital gains tax issue ,this is different for mutual funds as each  . This is different for mutual funds, as tax liabilities are shared among investors making them less tax-efficient. In mutual funds, there are holding periods when withdrawal of the funds will attract fines, this is not applicable to ETF funds. Also, there are minimums for investing in a mutual fund, but there are no minimums for ETF bonds.

WHICH IS GOOD FOR ME?

If you are a speculating and short term investor, waiting to exit at the right moment when the value of the bond rises, then ETF funds are the best for you. This because, there are no holding periods, benefits of intra-day trading and tax efficiencies. However, as a long term investor, maybe for retirement and in need of funds managers, then you can subscribe to mutual funds.

CONCLUSION

The suitability of any fund , depends on the choice and cravings of the investor. ETF or mutual funds can be the way to go, only make sure that you have enough information. It is also possible that you invest in both portfolios. For more information visit: http://bookkeeperco.com.au/bookkeeper/