MUTUAL FUNDS OR ETFs : WHAT TO CHOOSE??

When the entire global economy collapsed in 2008 investors started questioning the value add of Active Management. In 2007, the world famous investor Warren Buffet even bet that index fund like S & P 500 will beat active management funds in the course of 10 year. And guess what? He was right.
With this underperformance of actively managed funds against index as result in the shift of investors in Active to Passive way of investment. While passive mutual funds have their own perks.ETFs gained more popularity over them due to their tradability, transparency, and low costs. So which one is right for you? Mutual Funds or ETFs.
Lets start with the similarity first,
Both MF and ETFs are diversified baskets of securities such as stocks, gold, bonds etc. In both instruments people pool their money together and the fund manager who takes decision on their behalf as to which stocks to be added or removed to help you gain profits.
While mutual funds are usually active where a fund manager decides which stock to invest in when and ETF always almost tracks an index similar to index funds.
They allow you to invest in popular indexes like Nifty 50. Since the ETF will select the same shares as that in the index and in exactly the same proportion.
Coming to the differences now,
When it comes to liquidity that is the ability to buy and sell fast. Mutual funds usually take 1-3 days for the subscription and redemption to take place. While ETFs on the other hand can offer you instant liquidity as they are created on stock exchange and also as liquidity can be created in ETFs easily by authorized participants using ETFs creation and redemption process.
Next is an exit load that is the fees you pay if you take money out before the funds pre-defined time frame. Usually some mutual funds charge you around 1% in case you take your invested amount within 1 year. But when it comes to ETFs, there is no exit loads. ETFs never charges you and you can take your invested amount anytime you want.
Cash holding: when a fund holds your money and doesnt invest in stocks. This might happen if there are many investors who want to buy a fund and there is too much cash for the fund manager to invest. So the fund manager holds the cash and waits for the right time to invest. In mutual funds cash holding can be done if needed. With this you are just paying the fund manager holding your cash which otherwise you can invest in FDs or some other instrument to earn returns. Cash holding often drops down the performance of MFs and your returns are also impacted by the same. In ETFs there is no cash holding and all the money you invest is to put to work to gain your return.
Also, in terms of Transparency, ETFs are fairer then MFs. As ETFs holdings are published every day and you can see its value in real time and also you can see the portfolio holdings on daily basis. While in case of MFs there is less transparency into holdings as mutual funds NAV only available after the market is closed and also the overall MF portfolio is closed once in a month.
Now, comes the most important factor that is the fees or the charges you pay while investing in these instruments. MFs can be actively or passively managed and most ETFs are passively managed that is the stocks in them are changed in a pre defined time interval usually 6 months. As the changes happen not actively the trading and transaction charges of passive MFs and ETFs are usually less than active MF. Amongst passively managed mutual funds and ETFs the expense ratio of ETFs are way less than the MF.MFs expense ratio are usually in a ratio of 1-2% while that of comparable ETFs are around 0.3-0.6%.
There are also some drawbacks of ETFs investments:
ETFs have tracking era that is the difference between the index return and the fund return but this again can happen with MF also who is ranking in index.
SIP is inconvenient in ETFs as they are with mutual funds.
There are not many varieties of ETFs present in India and current offering of ETFs are very limited. However, this will change as EFTs become more popular and adoption of ETF increases in India.
Both have some pros and cons and it is up to you to choose in which to invest, but taking in consideration your investment goals and risk profile for investing in any of these.