ETFs and mutual funds are often misunderstood as same. Many times investors get confused between these two due to the similarities they share.

Mutual fund is a company which brings together group of investors who wants to invest in stocks. When you invest in mutual fund, it means you are buying shares from share market but not directly. ETFs are traded same as stocks on the exchange and can be hold for long term to accumulate wealth.

Even though both products share lot of similarities there are some differences like:

-Process of trading/investing,

-Legal structure

-Tax benefits

-Liquidity,

-Pricing

Difference between ETFs & Mutual Funds:

ETFs are passively managed funds and suitable for investors who do not want to take high risk. Exchange Traded funds are trade like stocks on stock market throughout the trading hours (real time pricing) while mutual fund on the other hand gets traded at its NAV which is calculated at the end/close of the day.

Mutual funds are actively managed funds and have loads/charges related to sales. ETFs follow a particular index which needs less operating cost and hence ETFs are low cost products than actively managed mutual funds. To put more specifically, ETF gives benefit of low expanses and low risk as they follow index like index mutual fund. For investing in mutual funds, you do not need demat while for ETFs you need a demat account as they trade like stocks in market.

Disadvantages of investing in ETFs:

-Liquidity as selling an ETF is hard.

-Concentrated risk

-Confusing settlement dates of ETFs

-Cannot beat market as it follows index

In India, investors are inclined more towards actively managed funds which gives high returns. While in the developed countries like USA, ETFs dominate mutual fund market. It is more popular there also because of benefits it offers like liquidity, tax efficiency, low managing cost etc.

When to invest in ETFs:

ETFs can help accumulate money for long term goal with low risk. ETFs are suitable specially for those investors who are looking for safe investment. There are few reasons due to which one can consider adding ETF to their portfolio like low cost, passive investment and if you want to diversify your portfolio.

There are different types of ETFs which you can use as a strategy

. To diversify

. To take advantage of market conditions, if you are an active trader

. Want to invest in any particular small segment of market or

. To take advantage of different sectors/asset classes like Gold, commodity, index etc.

The best way for an investor to choose between both of these investments is to identify his or her personal investment horizon, investment objective and style.