Know which to choose between ETFs or Mutual Funds?

Small investors are preferring ETFs more. Good investment in large cap stocks. Whereas in this segment, equity funds have lagged behind.

Mutual Funds: The investment market is full of options. The question is, how can you achieve maximum returns at the lowest cost? One option is to get returns by investing directly on stocks, and the other way is through investing in different types of funds. All options have their own advantages and disadvantages. But how to decide which option is better?

Active Funds and Passive Funds

Exchange traded funds (ETFs) and mutual funds invest in the market according to their theme. They invest in shares, bonds and gold. The returns received on these are subject to the same tax. Still there are some differences between these two.

ETFs follow Nifty or Sensex. Often their returns are similar to these indices. For example, if an ETF is based on Nifty50, it will see a similar uptrend or downtrend. It does not require active management. Hence its cost is less. They charge from 0.07 to 0.30 percent.
Mutual funds, on the other hand, are themed like large cap, midcap, smallcap. Fund managers manage them. These funds follow the indices, but do not necessarily show volatility accordingly. Sometimes they give better returns than the indices. It depends on the fund manager. They charge 0.75 to 2.50 percent.

Why passive investing is better

Index based investing was started by American investor Jack Bogli. He founded the Vanguard Group. He believed that index funds could track the entire market at a low cost. According to him, instead of chasing after a single high-performing stock, one should choose multiple stocks. And this facility is available in ETFs.

Now in India too, the trend of investing through ETF funds is increasing. Between January and October 2020, their AUM has seen an increase of 61 percent. While active funds i.e. mutual funds have underperformed in the same period. According to a Dow Jones analyst, around 80 per cent of large cap funds underperformed the S&P BSE 100 index in 2020.

When does it make sense to invest in equity?

Active funds, on the other hand, are able to beat the benchmark with the skill of their fund manager. Their cost is also higher than ETFs. Choosing a good stock is not an easy task, this is where the qualifications of a fund manager come in handy. Last year, only 20 per cent of large cap funds could give better returns than BSE100.

The choice for investors

Hence, the option is very clear for small investors. Does he want to achieve benchmark returns or take more risk for higher returns? Looking at the recent trend, it is known that small investors are preferring ETFs more. Good investment in large cap stocks. Whereas in this segment, equity funds have lagged behind.

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Article first Appeared on Informalnewz

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