Mutual funds and exchange-traded funds (ETFs) both bring together a collection of investments within a single fund. The key difference is how investors enter and exit the fund and how its price is determined.
With a mutual fund, investors subscribe to or redeem units through the fund provider. With an ETF, shares in the fund are listed on an exchange and can be bought or sold while the market is open.
How do mutual funds work?
When you invest in a mutual fund, you purchase units through the fund provider or an investment platform.
The price of each unit is based on the combined value of the fund’s investments, known as its net asset value or NAV. This value is calculated at set times rather than changing throughout the day.
When you want to withdraw your investment, you redeem your units according to the fund’s dealing schedule. Depending on the fund, this may be daily, weekly or at another specified interval.
Benefits of mutual funds
– Professional management of the fund’s investments
– Access to a clearly defined investment strategy
– A straightforward way to invest without selecting individual assets
– Different funds designed for different objectives and risk levels
How do ETFs work?
An ETF brings together a collection of investments within a single fund. Depending on its objective, it may provide exposure to equities, bonds, a particular market or another type of asset.
Each share in the ETF represents an interest in that collection of underlying investments. Rather than investing separately in every asset held by the ETF, investors gain exposure to them through the fund.
Unlike a mutual fund, an ETF’s shares are listed on an exchange and have a market price that can change throughout the day. This price generally reflects the value of the investments held by the ETF, as well as market demand.
Benefits of ETFs
– Access to a collection of investments through a single fund
– Exposure to different markets and asset classes
– Prices that are updated throughout market hours
– Generally lower operating and management costs
– Clear visibility into the fund’s underlying investments
Which one may be right for you?
Mutual funds may suit investors who want access to a particular investment strategy through a straightforward subscription and redemption process.
ETFs may suit investors who value cost efficiency or want exposure to particular markets and asset classes, whether held individually or as part of a managed investment plan.
The more suitable option depends on the fund itself, its costs and risks, and how well it supports your investment objectives.