0 hidden charges. 0 forex
debit-card

The Difference Between Stocks, Mutual Funds, ETFs and Index Funds

article image

The Difference Between Stocks, Mutual Funds, ETFs and Index Funds

Table of Contents

Yes, they’re different. And no, it’s not that complicated, let’s look at each of these in detail. But first, some context.

The rise in disposable incomes has led to the rise in financial investment tools too. That’s why there are far more investment avenues than ever before. TV shows and movies also had a role to play as they introduced uncommon terms like ‘bears’ and ‘bulls’ to the colloquial language. This is another testament to the fact that the rise in the popularity of investment is undeniable.

The investment tools of the stock market are luring investors. While some investors prefer to go the direct route, some find it easier to invest in funds linked to equities. The financial industry is bringing out various options to accommodate the choice of investors.

With rising financial literacy and brokers going digital, ETFs, Index funds and Mutual funds have become accessible to all at the click of a button. Let us understand the difference between them.

What are stocks

Stocks are a form of security that represents a fraction of the ownership of a company, called equity. Owning stocks gives the investor a piece of a company’s assets and profits. Units of stocks are called shares and are traded on a stock exchange. You can purchase or sell stocks from online stock brokers. An investor can own stocks of more than one company.

What are Mutual Funds

Mutual funds pool money from several investors to invest in securities like stocks, bonds, money market instruments, and other assets. This pooled sum of money is managed by professional fund managers. For instance, if a mutual fund invests in equities, then the concerned fund manager selects a few stocks and forms a portfolio. Each investor in a mutual fund owns a portion of this portfolio.

The price of a unit of a mutual fund is termed Net Asset Value (NAV). The profits from a mutual fund are distributed amongst its investors in proportion to the units held.

Mutual funds also make it possible for investors to invest in other countries' stock exchanges. For instance, several Indian mutual funds are investing in US stocks.

The different types of Mutual Funds are:

·       Equity Funds

·       Fixed-Income Funds

·       Index Funds

·       Balanced Funds

·       Money Market Funds

·       Income Funds

·       International/Global Funds

Difference between stocks and mutual funds

A stock, in itself, is a representation of the ownership of a part of a firm while mutual funds invest in a portfolio of stocks or other securities.

Stocks are traded on a stock exchange. Mutual funds, on the other hand, can be purchased or sold only through a fund manager.

How are MFs different from ETFs?

Mutual Funds and ETFs are similar in the way they function as a fund.

The major difference between ETFs and Mutual Funds lies with the way these are traded. Mutual Funds can only be bought or sold through a fund manager. ETFs, on the other hand, are traded on the stock exchange, just like a stock.

You do not need a Demat account to invest in a Mutual Fund while investing in ETFs requires one.

Most Mutual Funds aim to outperform the benchmark indices and are therefore called actively managed funds. ETFs are mostly passive funds that only track the performance of an index.

Passive funds vs managed funds

A managed fund is being actively tracked by a fund manager or a team of fund managers. If they believe that investing in another security can yield better returns, they can do so. Managed or active funds are backed by the fund manager’s research and aim to outperform the benchmark indices.

A Passive fund does not aim to beat the market. It only replicates the performance of the benchmark indices and ergo, is not managed by a fund manager.

You must not assume that a fund is actively managed. There are passive mutual funds and actively managed ETFs as well. It is advisable to read the prospectus of the fund beforehand.

3 things to bear in mind for first-time investors

·       There is no good or bad time to enter the market

Make up your mind to start investing because timing the market is impossible. The best day to invest in the stock market is today! Even the most seasoned of all analysts have failed to predict the performance of the market.

·       Patience is the key to success

There is no such thing as a free lunch or an overnight success. If you want to invest in equities, always have a long-term outlook. Markets keep fluctuating in the short term but have historically given impeccable returns to investors.

·       Diversify, not over-diversify

As the famous saying goes, do not keep all your eggs in the same basket. Buy stocks that belong to different sectors but abstain from buying too many stocks. On average, an investor is not able to keep a tab on more than 10 stocks. Focussed investment in a well-diversified portfolio is the answer to generating wealth.

How to start investing in Mutual Funds

Mutual funds are best suited for beginner investors who don’t know enough about investing, or do not have the time to self-educate. You can get started by opening an account on Fi, and use FIT Rules to set aside money for you in an index funds based on conditions set by you. This way you, invest small amounts of money and also reduce the risk associated with investing lumpsum amounts.

FAQ's

1)What are Index Funds in India?

An index fund can either be a mutual fund or an ETF that tracks the performance of a benchmark index such as Nifty50 or the BSE Sensex. Index funds are passive funds and as a result, attract low operational costs. Look for the top index mutual funds available if you do not like taking risks.

2)How to buy and sell Index Funds?

If you are meaning to invest in index funds in India, then you can do so by visiting the website of the fund of your choice or through a registered mutual fund distributor.  

3)What is the difference between an ETF and a Mutual Fund?

Exchange-Traded Funds (ETFs) behave just like mutual funds, except they are traded on the stock exchange. Thus, ETFs can be understood as a mix of stocks and mutual funds.

4)How to keep a track of your mutual fund performance?

The internet has made it easier to track your mutual fund performance. Be in touch with your fund manager to be up to date. Your fund manager must update your portfolio’s performance on their website or app. Alternatively, you can use Google Sheets to track the amount you’ve invested alongside the present value of your investment using a Google Finance formula. 

5)What Is A Mutual Fund And How Does It Work?

A mutual fund is an investment tool that invests money collected from several investors in securities like stocks, bonds, money markets, gold, etc. A professional fund manager takes care of this pool of money. The fund manager forms a portfolio of securities to invest in and thus allocates a portion of that portfolio to the investors, in proportion to the units held by them. Actively managed mutual funds aspire to beat the market by giving their investors better profits than the benchmark indices.

6)How to Save Taxes with Mutual Funds?

Equity Linked Savings Scheme (ELSS) are the mutual funds that invest in equities or equity-related securities. You can avail of a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961. However, these funds come with a lock-in period of 3 years. ELSS are some of the best mutual funds to invest in.

Time to switch to Fi. Smart banking and only that.
Related Posts
Get the Fi app