More than ever before, Indian investors are taking a keen interest in passive investing. Index Mutual Funds and Exchange-Traded Fund (ETF) - are two ways by which passive investing is done in the equity markets.
In this video, we pan our focus on understanding the differences between these two financial products and will also look at the scenarios where one is better than the other
Topics Covered:
00:00 Introduction
01:43 FUND MANAGEMENT STYLE
02:53 TRADING STYLE
03:48 MINIMUM INVESTMENT
04:51 EXPENSE RATIO
06:24 LIQUIDITY
07:34 SIP
09:07 WHICH ONE IS RIGHT FOR YOU?
1. FUND MANAGEMENT STYLE
Index funds are passively managed instruments but that’s necessarily not the case with ETFs .. because ETFs can be passively managed or can also be actively manager. Infact, as it stands, about 20% of the ETFs in the United States are actively managed ETFs .. which means there is an investment team that is researching companies and taking decisions on the ETF's portfolio allocation
2. TRADING STYLE
From an operational perspective, an index fund is a mutual fund while an ETF comes closer to how a stock works.ETFs, much like stocks, can be traded throughout the day at a price that goes up and down. Index funds can be bought and sold only at the price which is published at the end of each trading day
3. MINIMUM INVESTMENT
ETFs are bought in units while index funds are generally bought in terms of an amount.
In the case of ETFs, most trading platforms allow their investors to buy even a single unit.
Index fund - all mutual fund companies require a minimum order value of at least 100 rupees with some AMCs starting higher at 500 rupees for SIP and lumpsum transactions
4. EXPENSE RATIO
ETFs and index funds both come with relatively low expense ratios. But relatively, ETFs tend to be cheaper than index funds in most scenarios.
There are two additional costs that ETF investors need to be aware of:
1. Commissions charged by your broker i.e. the trading platform - which is typically a percentage of the amount traded or a flat fee per transaction.This commission or fees is generally a mix of many expenses like brokerage, GST, STT, stamp duty, exchange fees, SEBI turnover tax,etc.
2. Bid-ask spread - which is a small transaction cost that is embedded in the price of the ETF
5. LIQUIDITY
With index funds, there is no real concern on the liquidity front. However, when it comes to ETFs the lack of liquidity can certainly be a concern. And that’s because unlike an index fund here, the investor is buying the ETF like any other equity share.
6. SYSTEMATIC INVESTMENT PLANS
Systematic investment plans or SIPs are a popular method of investing for retail investors .. with monthly inflows consistently crossing the 8,000 crore mark for many months now. While index funds offer the SIP facility ETFs generally do not offer a SIP option. But more recently, we have seen a couple of platforms offering an ETF-SIP facility .. but these are far and few .. and hopefully more platforms will introduce this vital facility in the months to come
WHICH ONE IS RIGHT FOR YOU?
ETFs and index funds are quite similar and choosing one over the other will depend on what you seek as an investor and your investing behavior
For instance, if you are someone who is a long-term investor with long-term goals .. you would prefer a disciplined approach to invest. which can be best provided by an index fund via the SIP facility
However, if you are keen on trading when the markets are volatile, then ETFs might serve as the more worthy tool. In fact, many tactical investors who have an above-average understanding of the stock markets tend to trade in ETFs for very short durations especially if there has been some news-driven market dip
Choosing between an index fund and an ETF is a matter of selecting the appropriate tool for the job.
Index funds should be your core holding meaning, index funds are where your long-term wealth-building vision should be trained at.
ETFs can be more tactically deployed when there are news-related spikes and dips. Another use of ETFs can be in picking certain sectoral baskets which might be undervalued presently and are expected to go up in the short term.
#ETMONEY #ETF #IndexFunds #MutualFunds
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