Historical financial data shows stocks are likely to perform better for you than both real estate and cash, but of course investing in stocks may seem more confusing than buying a building or keeping cash in the bank. The good news is, there are two easy ways to invest and diversify: mutual funds and exchange-traded funds (ETFs).
The case for ETFs- Research shows that active fund managers cannot beat the indices consistently in the long term. Even then, while there are 2,000 plus ETFs listed in US managing $4 trillion globally, , in India, the size of the Indian ETF market has grown to only Rs 65,124 crore versus actively managed equity funds, which galloped from Rs 29,362 crore in 2004 to Rs 8.55 lakh crore odd now.
ETFs and mutual funds both involve pooling money that becomes part of a big fund invested in a mix of different assets. Depending upon the mutual fund or ETF you buy, you can gain exposure to a broad mix of different assets with just a single fund purchase, making it easy to diversify and reducing risk compared with purchasing shares in a single company.
While ETFs and mutual funds have a lot in common, there are important differences between them that you should understand when you decide which investment is right for you.
Mutual funds vs. ETFs: Which are better?
When you’re choosing between mutual funds and ETFs, here are a few key pros and cons that can help:
- ETFs offer more trading flexibility: ETFs are traded like stocks. They’re priced based on what investors think the market value is and you can buy and sell shares throughout the day. Mutual funds, however, can only be purchased or sold at the end of the trading day after the market closes and their price is based on Net Asset Value (NAV) — the value of fund assets minus liabilities divided by the number of shares.
- ETFs provide more transparency: ETFs typically disclose holdings daily. Actively managed mutual funds typically disclose their holdings on a monthly or quarterly basis.
- ETFs are more tax efficient than mutual funds: Both ETFs and mutual funds are treated the same by the income tax authorities.
- ETFs often have lower fees and expenses: ETF expense ratios are typically lower than mutual fund fees.
- Mutual funds are more likely to be actively managed: Most ETFS are index funds, which track market indexes. While there are some actively managed ETFs, these tend to have higher prices. While some mutual funds are passive index funds, there are far more actively managed mutual funds than actively managed ETFs. With an actively managed mutual fund, a fund manager makes choices about how to allocate fund assets as opposed to assets being purchased simply to track an index. Active management can be a good thing if the fund manager is talented and is able to outperform the market. However, not all fund managers are good ones — and you’ll still likely pay higher costs for a poorly managed mutual fund than for passively managed ETFs.
Both ETFS and mutual funds provide an easy way to invest in stocks and build a diversified investment portfolio. Ultimately, you’ll need to consider a variety of factors including your tax strategy, the amount of money available to invest, and your overall investment strategy in order to determine which option is right for you.
ETFs in India
Over a 10-year period, 45% of active funds have underperformed the Nifty 50. High costs/TER can be one of the reasons for this underperformance.
Benchmark launched India’s first exchange traded fund followed by many other asset management companies. Recently, when Employee Provident Funds started investing in in the market through such funds that equity funds started doing larger amounts of money.
ETFs which track the broader indices like Sensex and Nifty charge 0.05%-0.10% annual total expense ratio (TER) whereas the TER of actively managed funds can go up to as high as 3%.
Starting from and equity ETFs, fund houses are innovating their offerings by adding new flavor to their products including ETFs to participate in Gold , Silver, US indices and debt markets. Further, while traditional ETFs mimic their underlying index based on market capitalization, the new age ETFs called smart beta ETFs have emerged. These ETFs which combine both active and passive methods of investing by looking at factors such as earnings, low volatility, return on equity, dividend yield, etc. through custom build indices. The popularity of ETFs is growing due to the government’s plans to divest its holdings in PSUs through this route.
We at PL Offer you the option to start investing into ETFs via both our Trading Terminals or Mobile App (www.plindia.com/plmobileapp) as well as via the Systematic Investing route (SIS). Do write to us at email@example.com for more information.