Investing in exchange-traded funds or mutual funds has been popular for quite some time. And these two investment ideas have a lot in common, but which one is considered to be a smarter choice, and where should one invest?
They both have a mix of assets, and you can easily use them to diversify your investment portfolio. On the other hand, there are also some key differences.
Let me walk you through the investment opportunities of ETFs and Mutual Funds and make it easier for you to figure out which one is better and more reliable for you.
What are Mutual Funds?
The MFS Investment Management provides mutual funds, and since the 1920s, they have been offering investors great ways to enjoy pooled offerings. Some of these are passively managed, but the investors are mostly focused on the added value they can acquire from the managed strategy.
Mutual funds allow investors to invest in securities such as stocks, bonds, variety, and other assets and can be either actively or passively managed. One thing to keep in mind is that mutual funds come with various share classes, and each one of these has its fee structuring.
So, let’s take a look at some of the advantages and disadvantages of mutual funds.
Advantages of Mutual Funds
- Mutual funds are highly liquid assets because they are easy to sell and buy.
- With mutual funds, investors get access to buying investments that would otherwise be a lot harder to buy and manage on their own.
- Investors have someone else doing the work instead of them, which some investors find to be very helpful.
- Mutual funds allow you to own thousands of securities, which leads to a well-diversified portfolio and lower risk.
- There’s a professional management team. You will have someone that takes care of your investment as you try to focus on better investment opportunities.
- Mutual funds are affordable for new investors with a capital between $500 and $5,000.
Disadvantages of Mutual Funds
- Fees can be costly, and the more you invest, the higher the fees.
- Share prices change during the day, so they can vary all the time.
Mutual funds have a higher minimum investment requirement than ETFs. And with that being said, it’s time to walk you through what ETFs are.
What are ETFs?
Exchange-traded funds are one of the most valuable assets for investors. Through a brokerage firm or stock exchange, investors can buy and sell securities.
ETFs cost less for the entry position, as they include the cost of a share and commissions. This type of funds are priced regularly by the market, so there is a potential for trading at a price that’s different when compared to the NAV, and that brings arbitrage to the table.
As exchange-traded funds offer many benefits, they are an excellent choice for many investors. So, let’s see why so many investors consider ETFs a good investment.
Advantages of ETFs
- ETFs offer great liquidity.
- As exchange-traded funds track a specific market index, they can be bought and sold like stocks.
- There’s no actual sale of securities, and that means there’s no capital gains tax liability. But there are situations when you do have to pay tax.
- With more than 600 different ETFs, you will have no problem diversifying your portfolio as you trade wisely and with great results.
Disadvantages of ETFs
- You will have to deal with commissions and trading fees
- The unknown index factor can be a downside since the ETFs are tied to it.
Now that I’ve walked you through the main advantages and disadvantages of ETFs and Mutual Funds let’s see where investors should invest their money – in ETFs or mutual funds.
ETFs vs. Mutual Funds: Where to Invest?
Investors who are interested in ETFs and mutual funds need to take a lot of things into consideration before choosing one of both types of funds. And as you can imagine, the choice depends on the investor’s goal.
Both ETFs and Mutual Funds, consist of different securities and assets and are an excellent choice for a well-diversified portfolio. While ETFs can be traded like stocks, mutual funds can be only purchased at the end of a trading day based on an estimated price.
ETFs are passively managed, based on a market index and more tax-efficient, while mutual funds are actively managed to buy or sell assets by a fund manager and less tax efficient. Both types of funds have different fee structures and tax implications.
Both investment choices have a lot in common and are an excellent way for investors to diversify their portfolios. Investors need to study the market and decide what they want to achieve. The more they learn, the higher the chance of becoming successful investors is.