Those who are looking for investments are often confused between mutual funds and ETFs. For many, ETFs hold the reign as they are more in fashion now. But when it comes to mutual funds, there are several advantages that you get from them that are unavailable elsewhere including ETFs. But before coming to the advantages of mutual funds over ETFs, let us understand what they are:
Mutual funds consist of a large amount of money pooled together from different investors. What varies in mutual funds is the scheme. Depending on the scheme you have pooled your money in, there will be a fund manager for it to analyse where to invest the pooled money. From bonds to stocks to gold, a fund manager can invest your money anywhere depending on what seems most profitable from his perspective.
The functioning of Exchange Traded Funds or ETFs is completely different from ETFs. ETFs work as regular stock and are listed on the stock exchange. As an investor, you can easily buy and sell shares of ETFs on the stock exchange. ETFs commonly track market indexes or commodities. The ETFs that track the index are also known by the name of index funds.
Why Mutual Funds Are Better Than ETFs?
If you are interested in mutual funds, click here for advantages of mutual funds. But when it comes to ETFs, there are several reasons that make mutual funds better than them. Some of the reasons are as follows:
There are almost all types of funds and schemes you will find in mutual funds. The sheer range of diversity it manifests, cannot be replicated elsewhere. ETFs, on the other hand, replicate the index and try to mirror its returns. There is not much diversity in its working or investment schemes, at least not as much as there are in mutual funds.
One of the major advantages of mutual funds over ETFs is that the mutual funds are actively managed. ETFs are passively managed, as they follow the trends of the market index and do not require much intervention. Although there are active ETFs, their number is relatively low and they do not offer much. To break the barrier of an index and generate even higher returns, the funds should be managed actively. This is where mutual funds get the upper hand over ETFs.
The expense ratio of ETFs is generally lower than that of mutual funds. The simple reason behind this is that there is not much scope for service in ETFs. It simply duplicates the market index. On the other hand, the advantages of mutual funds in terms of service quality are plenty. Whether you need free fund transfers or get phone call support from experts, there is a lot that you can expect from mutual funds. Of course, it comes at a price that is a high expense ratio. But the gap between the expense ratio of mutual funds and ETFs is not that much. Whereas the difference in their service to the investors is pretty stark.
Systematic Investment Plan
One area where mutual funds take an upper hand over almost all forms of investment including ETFs is in providing an automatic or Systematic Investment Plan (SIP). With the help of the SIP scheme, you will be able to invest monthly without needing to make any effort. By charting out a plan, a fixed amount will automatically be deducted from your bank account and credited to your investment pool. This way your investment will keep on increasing gradually. No such scope is possible in ETFs.
These are some of the advantages of mutual funds which you will not find in ETFs. From mitigation of risk to creating a diverse portfolio, if you want handsome returns without getting into too much risk, the mutual fund is just the right investment plan for you.