ETF vs Mutual Funds

While there're lots of campaigns promoting Mutual fund, not much is promoted about ETFs of exchange traded funds.

This post shares the difference between ETF and Mutual Funds 

Main advantages of ETFs:

- We can buy/sell ETFs at market price or can put a limit order (like SELL if it reaches 105 INR, buy if it reaches 95 INR)- For those who can track the market actively, good at taking calculated risks, ETFs give more control to buy and sell at will at specific prices. Mutual funds on the other hand are bought/sold at end of the day NAV, with cut off at 2 PM or 3 PM each day- thus users won't have exact control what NAV they will get. It doesn't make a drastic difference, but when investing in large volume, even 0.25% could mean difference of 1000s of rupees.

- Buying/selling ETF attracts brokerage fee, stamp duty and capital gain tax on profit. Mutual funds attract stamp duty and some charges like exit ratio if sold within 1 year. Most demat account service providers will be charging an annual fee/AMC.

Mutual fund payout processing ususally takes 2-3 days, whereas ETF sale money is credited to your bank account next working day. ETF is relatively more liquid.

Many Mutual funds have certain limit like minimum investment is 5000. ETFsc an be bought in multiples of each unit, at its current price, like you would buy any share.

Risks associated with ETF:

Selling an ETF could be tricky if there're no buyers when you want to sell. This issue may occur with less popular ETFs with lesser volumes. In Mutual fund, once you apply to redeem, Mutual Fund house is required to take back your units and hand over money.

ETF can only be bought through a demat account and most demat accounts come with annual AMC fee and each transaction will attract brokerage, STT, GST and other charges. Mutual funds also have expenses such as Expense Ratio that applies if redeemed within 1 year. Mutual funds bought through "Regular" plan also means part of your earning goes to agency that sold you the plan.