A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
What are the advantages of ETFs?
Exchange-traded funds (ETFs) offer several advantages over regular mutual funds. They are a great investment vehicle for first-time equity investors who are worried about losing money in mutual funds. That’s why?
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ETFs mimic a popular index, deduct all stocks held in the index and offer greater diversification than mutual funds • The imitation strategy (passive fund management) results in fewer transactions than actively managed funds that often buy or sell securities from their portfolio to show a higher return than their benchmark. This abandonment of actively managed mutual funds leads to a higher tax incidence as funds have to pay securities transaction tax (STT) and capital gains tax when buying or selling securities within their portfolio. So ETFs are more tax efficient than other mutual funds.
• ETFs also have a lower expense ratio than actively managed mutual funds that must employ highly qualified fund managers to generate active returns, i.e. returns above their benchmark index.
• ETFs offer more convenience and liquidity to investors as they are listed on the stock exchange and trade like stocks. Investors can make transactions in ETF funds at any time during market hours at real-time prices unlike actively managed mutual funds where NAV is calculated only once a day after the market closes. If you’re not sure about stock investing, ETFs are your place to start!
