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 company in the UK.
What is an exchange-traded fund (ETF)
An ETF is an exchange-traded fund, which unlike regular mutual funds operates as a common stock on an exchange.
Units of an ETF are usually bought and sold through a registered broker of a recognized exchange. The units of an ETF are listed on the stock exchange and the NAV varies according to market movements. Since the shares of an ETF are only listed on the stock exchange, they are not bought and sold like any normal open-ended stock fund. An investor can buy as many units as he wants without any restrictions through the exchange.
In simple terms, ETFs are funds that track indices such as CNX Nifty or BSE Sensex, etc. When you buy stocks/units of an ETF, you are buying stocks/units of a portfolio that tracks the performance and return of its native index. The main difference between ETFs and other types of index funds is that ETFs do not seek to exceed their corresponding index, but simply replicate the performance of the index. They don’t try to beat the market, they try to be the market.
ETFs typically have higher daily liquidity and lower fees than mutual fund schemes, making them an attractive alternative for individual investors.
