Greetings, first of all! Welcome to meriSIP.com Today we will learn, where should you invest your money? ETFs or Mutual Funds?
Why ETFs are popular?
First of all, read our post about What are ETFs? (you can skip if you really know, what are ETFs?). There are times when ETFs are good and times when Mutual Funds are better option. It totally depends on Personal Finances. “Personal Finance is more personal than Finance”.
If I ask you why ETFs, You will straight away recite the following lines that you heard somewhere: –
- Low-Cost Investing
- Buying at low Prices During the Day
Today we will cover: –
1. History of ETFs
2. When to buy ETFs over Mutual Funds?
3. When to buy Mutual Funds over ETFs?
4. Myths Busted
5. Conclusion
6. SEBI Disclaimer
1. History of ETFs
While Mutual Funds were invented in 1920s in USA. Initially an attempt was made by Stock Exchanges in USA in 1989 to steal some of the volumes of other stocks exchnages there specially Chicago Merchantile Exchange (CME).
CME had invented futures contract of S&P 500 way back in 1980s. So Amerian Stock Exchange (AMEX) wanted to create a such product which can be considered as a single stock of S&P 500 that can be traded during day.
But the problem was that it was taken through route of futures contract first. So CME sued AMEX for that product that they listed this as a mimic stock of S&P 500 but never had stocks. American law held the petition and told them to make such a product that actually hold all stocks within that Index instead of this Futures one. Nathan R Most, a physicist turned financial executive designed the product.
2. When to buy ETFs over Mutual Funds?
In the following situations, one should opt for ETFs instead of Mutual Funds: –
- Someone who wants to aviod exit loads in mutual funds of same index.
- If Mutual Fund of certain Index is not availabe but ETF is available.
- Someone having large amount of money to invest. But mutual funds of same index costs them more than ETFs.
- Someone who want to time the market during day with lesser amount and no leverage.
- Someone who wants more liquidity than Mutual Funds.
3. When to buy Mutual Funds over ETFs?
In the following situations, one should opt for mutul Funds instead of ETFs: –
- Somebody who do not want to time the market during day.
- In most cases (for Retail traders), ETFs cost more than Mutual Funds. In that case buy Mutual Funds for that Index.
- Somebody who wants to invest in actively managed Mutual Funds (taking bet on some specific Fund Manager).
- Someone whose emotions take over when they see prices changing (as ETFs’ prices change every second) in their protfolio.
- Someone who just want to invest thorugh SIP.
4. Myths of ETFs busted
- Low cost: –
Example – I am taking example of investing one lakh rupees into Nifty 50 Index mutual fund and Nifty BEES ETF through Zerodha. Let’s calculate cost: –
UTI Nifty 50 Index Fund v/s NIFTY Bees from Zerodha ETF
What do you think which one would be low cost? An intellectual person would say “Nifty Bees ETF from Zerodha”. But the right answer is UTI Nifty 50 Index Funds, please bear with me till last to understand why? ETFs can only be bought from demat accounts so we choose Zerodha, the Account Maintenace Fees at Zerodha is @75+18% GST per quater i.e 88.2 * 4 = 354 per annum.
Now, Expense Ratio other than ETF itself = 354/100000 * 100 = 0.34% (This is extra onto the Expense Ratio of ETF itself).
So, Do calculate how much would you invest and which option is better for you.
2. Buying Low During Day – 2nd Myth
We chose mutual funds because we wanted not to time the market. So, how can you think to time it? Also, how do you know it is the low during day itself. As every intraday low can be broken dring day if the underlying asset closes at its lowest point after market close.
5. Conclusion
In Investing, everything that you hear can / can’t be useful for you. So the investors must visit to the experts for the help because they can get biased to some decisions.
“Biases are inevitable, our job is to let you get affected less”
6. SEBI Disclaimer
SITARAM | ASSOCIATION of MUTUAL FUNDS in INIDIA (AMFI) registered Mutual Funds Distributor | ARN No – 354499
Do your own research before investing any money into mutual funds. And if you want to take guidnce from us you can click on the whatsapp icon to get in touch with us.
