In India mutual fund schemes are categorized as two types – actively managed mutual fund schemes and passively managed mutual funds. While actively managed mutual funds have broad categories like equity, debt, hybrid and solution oriented, in passively managed funds, there are two types, ETF or exchange traded fund and Index funds.
ETF funds are mainly perceived to be tracking Index benchmarks and replicate their returns. But that is not the case, as exchange traded funds also have sector funds, commodity funds, like gold and silver and also have different categories, like large cap, midcap and small cap, etc.
ETFs are very popular in the developed countries like USA and UK, but slowly and surely they are gaining popularity in our country too, due to its simplicity, low expense ratio and increasing number of types and category of ETFs. Investors are getting aware that not only one can invest in market indices like Nifty and Sensex, they can also invest in commodities like silver and gold and categories like mid, large and small caps. There are sector ETFs too, like banking, consumer, etc. over and above having variety of debt fund solutions through the ETFs.
However, the actively managed mutual fund schemes continue to have the larger pie of the AUM and more popular with the investing public as they are very old in the system. The other reason why the active funds are popular is because the SIP facility is not available in exchange traded funds. As you know, SIP as an investing concept in mutual funds is quite popular and contributes more than Rs 13,000 Crore every month to the industry.
Let us now see what are the main difference between ETF and actively managed mutual funds?
How you can invest – To invest in ETF, you should have a demat and trading account, using which you can invest in ETF funds during the market hours as you will invest in any other shares. Opposite to it, for investment in active mutual fund schemes you do not need any demat or trading account, you can invest/ redeem/switch during the cut-off period during the day and the mutual fund NAV declared at the end of the day will be applicable to you. In case of ETF, even though the NAV is declared at the end of the day, the rate applied to you will be the one you opted for/got during the trading hours. It means the unit rates of ETF funds keep changing during the day based on the demand supply just like shares.
How to start a SIP – SIP cannot be started in ETF, you can have SIP only in actively managed mutual funds schemes.
Fund management – ETFs being passively managed, the fund manager tries to replicate the Indices it is benchmarked to, contrary to the fund manager of actively managed mutual funds which always endeavours to beat the benchmark returns.
Cost – Total expense ratio known as TER, is much lower for ETFs as they are passively managed and high in case of actively managed mutual fund schemes.
Taxes – Taxes are same for ETF and actively managed mutual funds.
In this read we tried comparing the active and passive mutual funds. The growth of exchange traded funds is on the rise and it is also due to huge growth in number of new demat accounts opened during the Covid period and onwards.