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 is a better option to invest in: ETFs or index funds?
Index mutual funds and ETFs are passive investment vehicles that invest in an underlying benchmark. Index funds operate as mutual funds while ETFs trade like stocks. So it depends on your investment preference to choose one over the other for the same passive investment strategy.
ETFs are suitable for intraday trading, limit or stop orders, and short selling, but if you’re not one of those who likes to time the market, index funds are for you. While frequent transactions can increase commission costs and reduce the return of ETFs, they also tend to have a lower expense ratio than index funds. But index funds offer you various options to meet your financial needs such as the growth option for long-term goals versus the dividend option for regular income. You can also regularly invest in smaller amounts via SIP in an index fund. You also don’t need a Demat account to invest in index funds unlike ETFs.
While both offer exposure to a broader market through passive investing, operational differences between them can become the deciding factor for convenience. Just like when you want to travel from Mumbai to Goa, you could choose a train or night bus. While both serve your ultimate goal, choosing one mode over the other for convenience is purely an individual choice.