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Mutual funds have been a preferred choice for many individuals owing to the wide range of options and automatic diversification it offers. Depending on what you yearn from your portfolio and your risk profile and investment horizon, it might be the right time to switch from mutual funds to ETFs.
What are ETFs?
Similar to an index fund, a type of mutual fund, ETFs or an Exchange Traded Funds are marketable security that tracks a particular index, bonds, commodity, or a basket of assets. These are funds that track indexes such as BSE Sensex, CNX NIFTY, etc. When you buy units/shares of an ETF, you purchase units/shares of a portfolio tracking the return and yield of its native index.
Who are ETF funds best-suited for?
Since most ETFs are index funds, they are ideal for investors looking to employ a buy and hold strategy. These investors also have the belief that the markets will generate positive returns over time. Unlike mutual fund investments, that require meticulous analysis of the manager’s track record, investing in ETFs requires you to be just bullish on the underlying index.
Whether ETF funds are an ideal investment choice for you depends on what you are lookingfor from your investments. If you’re on a lookout for an affordable investment that generates moderate returns, simultaneously sacrificing the potential for added gains in exchange for lower risk, then ETFs can be an excellent option for you.
When are ETFs the right choice?
You might want to switch to ETFs if your mutual fund investments are not meeting your needs anymore. For some, investing in ETFs makes sense as expenses associated with mutual fund investments have the potential to eat up a sizeable proportion of your returns. Additionally, if you prefer an investment impending to grow with time without adding on to your tax liability every year through capital gains distributions, ETF funds can be an ideal choice.
Moreover, investors on the verge of retirement might want to resort to ETF investments especially if they invest through tax-deferred savings account like IRA or 401(k).
IF you are currently investing in an indexed mutual fund, scour for ETFs that accomplish the same objectives at a lower cost. If you prefer an actively managed fund that strives to beat the market, mutual funds could be your go-to options due to the wide range of options available. Although one should be aware that high-risk plus high-reward ETFs are increasingly gaining momentum.
Just like ETFs, the benefits of mutual funds are innumerous. Whether you choose to invest in mutual funds or ETFs completely depends on your risk factor, investment horizon, and financial goals. It goes without saying that you do not have to choose between them if both ETFs and mutual funds meet your investment goals in different ways. Happy investing!
