How mutual funds differ from ETF?
Mutual funds and ETF (exchange-traded funds) have uncountable similarities already. Both of them comprise a blend of several types of assets and provide a common means for investors to diversify. The only key difference lies in the way things are managed in mutual fund and ETF.
You can only trade ETF like stocks; however, you can purchase mutual fund at the end of the trading day, depending on the calculated price.
You can also actively manage mutual fund; it simply means a fund manager will take decisions about locating assets in the fund. However, you can manage ETF passively based on the particular market index.
Mutual Funds is primarily used for buying or selling assets while staying within the limits of funds to beat the market and encourage profit for investors. As ETF are passively managed, they track a specific market index and be sold or purchased as stocks.
The mutual fund comes with higher fees and expense ratio when compared to ETFs.
An example of mutual fund vs ETF
For instance, an investor redeems cash worth $50,000 from the Poor’s 500 Index (S&P 500) fund and a traditional Standard. Now the fund must sell stock worth $50,000 to pay the investor. If that happens and the cash for the investor is freed, the fund attends the capital gain and then distributed to shareholders before year-end. That’s the reason why shareholders pay the taxes within the fund. If ETF shareholder wants to redeem $50,000, ETFs don’t need to sell stock in the portfolio. Instead, it provides in-kind redemptions to shareholders that limits the possibility of paying capital gains.
ETFs are most tax-efficient because they are easily managed when compared to mutual funds. However, many factors must be considered while choosing which is better among mutual funds and ETF.
