Securing your financial future is one of the most important responsibilities. There are several alternatives to guarantee your money creates appropriate returns according to your financial objectives.
Mutual funds , Stocks and ETFs are some of the most popular of the numerous investment choices accessible to investors in India. Despite the fact that all of these items appear to be very similar, there are some distinctions between them. Before discussing the key differences between stocks, mutual funds and ETFs, let us understand their meanings in detail.
What are ETFs?
ETFs, or Exchange Traded Funds, are index-replicating passively managed funds. These funds typically hold all of the equities in the same proportion as the underlying index. A fund manager does not actively manage an ETF. It just monitors the index's performance. ETFs are actively traded on a stock market and may be bought and sold at any time throughout the trading day.
What are Stocks?
A stock (also called equity) is a financial instrument that reflects ownership of a portion of a company. This entitles the stockholder to a share of the corporation's assets and earnings according to the amount of stock they possess. ‘Shares’ are the units of stock.
What are Mutual Funds?
Mutual funds are professionally managed investment plans that pool money from a variety of participants and invest it in a variety of assets. Mutual funds invest in a variety of securities, including bonds, stocks, and debt instruments, among other products. Every scheme has a fixed NAV (Net Asset Value), which is calculated by dividing a mutual fund's total investment by the number of investors.
ETFs vs Stocks vs Mutual funds
Fees and Expenses
ETFs do not impose marketing costs hence, they are less expensive than mutual funds and may be acquired commission-free. Although some mutual funds do not impose load fees, they are often more expensive than ETFs due to administration and marketing costs.
On certain sites, you may buy stocks without paying a commission, and there are usually no fees once you buy them.
ETFs spread risk by following several firms in a particular area or industry. Whereas mutual funds reduce risk by putting up a portfolio that includes a variety of asset types and security instruments. In case of a stock, risk is concentrated in its performance.
Trading price and period
ETF prices can be traded at a premium or a deficit to the fund's net asset value during regular hours whereas mutual fund pricing is based on the entire fund's net asset value which can be redeemed only at the end of a trading day. Stock returns are determined by how well they performed in the markets and they are exchanged during regular hours.
Control over investment
Stocks provide maximum control over the investment whereas the least is in the case of a mutual fund. The control in exchange traded funds is more than mutual funds but less than stocks.
ETFs are the most tax-efficient of the three forms of financial instruments since ETF share transactions are considered as in-kind dividends. When mutual funds return money or incorporate certain types of tax-exempt bonds in their portfolio, they receive tax benefits.
And in case of stocks, ordinary income tax rates or capital gains rates apply.
ETF is essentially a fund that possesses part of the underlying assets and the ownership is predetermined as shares. You often have indirect ownership of the assets without any direct claim. As an ETF is more like an inventory, it is of a changing value.
In contrast to mutual funds, the value of which is based on the net asset at the end of the day, changes the day. On the other hand, mutual funds are not just investing in a single company but they have a portfolio consisting of many equities, which the fund managers actively manage.
Investors with comparable financial objectives spend their money in different asset classes similar to the purpose of specific funds. Hence, investors can do a comprehensive review of these before determining which one is suitable for their investment .