Today there are various options for NRI investment in India that offer attractive ROI. NRI mutual funds and exchange-traded funds (ETFs) are amongst the most popular investment options. Because of some similarities, they both look the same to uninformed investors. However, there are key differences between them when analyzed carefully. Here you will find the difference between mutual fund vs ETF investment and know which one is the best for non-resident Indians to invest in India.
Mutual fund vs ETF
Mutual funds and exchange-traded funds have many similarities. Both MFs and ETFs consist of a variety of different assets and allow investors to diversify their portfolios. Despite many similarities, mutual funds and ETFs have some key differences.
Mutual funds
Mutual fund is an investment fund that collects money from many investors to purchase securities, such as stocks, bonds, deb instruments, money market instruments, etc. The investment pool is managed by a professional fund manager or team, who make assessments of the type of securities to invest into. The investor owns a share of the mutual fund, which generates returns depending on the performance of the underlying assets.
Professional fund managers with in-depth knowledge of markets and different types of securities build a diversified portfolio to generate maximum returns for investors. Hence, investors don’t need to study the stock market.
The market value of the portfolio is determined depending on the price movement of the underlying assets. The portfolio value, also known as net asset value (NAV), is calculated by dividing total net assets of the fund by the number of outstanding units. Higher NAV means the portfolio gains, and lower NAV reflects a loss in the portfolio value.
Just like residents, NRIs can invest in mutual funds in India by completing their KYC as an NRI.
Types of mutual funds
Mutual funds can be broadly classified into three categories – equity funds, debt funds and hybrid funds.
- Equity funds: Funds that predominantly invest in equities or stocks of companies.
- Debt funds: Funds that invest in debt securities.
- Hybrid funds: They invest in both equity and debt securities.
Exchange-traded funds (ETF)
Exchange traded funds (ETFs) are investment funds, which are traded on stock exchanges. They can be purchased, sold or transferred easily like the shares of a stock. In many ways, ETFs are similar to mutual funds, except that ETFs are bought and sold through a brokerage, like stocks, rather than through fund management companies.
ETFs are not actively managed by a fund manager. Exchange-traded funds hold assets like stocks, bonds, currencies and commodities. They are actively traded on stock exchanges for an amount close to their net asset value, during a trading day.
Most ETFs are managed like index funds and consist of stocks of different companies available in the particular index. As compared to mutual funds, ETFs tend to have lower fees and higher daily liquidity.
Advantages of ETFs
- Since there is no minimum investment requirement, investors can buy even one share.
- Commission paid to the broker at the time of purchasing or selling ETFs is the same as that paid for a regular order.
- Price of the ETF can vary throughout the day and it can be bought and sold in real-time.
NRIs are also allowed to invest in an ETF in India on repatriation as well non-repatriation basis.
Difference between mutual fund and ETF
While mutual funds and ETFs have many similarities, here are some key differences between the two investment avenues – mutual fund vs ETF:
| Mutual Funds | ETFs |
|---|---|
| Mutual fund units can be purchased by placing a request with the fund house. | ETFs can be actively bought and sold on public exchanges, just like any other shares. |
| MFs are actively managed by fund managers or professionals. | These are passively managed funds that track the performance of an index. |
| Mutual funds have some minimum lock-in time, selling units before this may incur a penalty. | ETFs generally don’t have any lock-in period. Investors can buy or sell ETFs at their convenience. |
| Mutual funds are traded at the closing net asset value. | Exchange-traded funds are traded at the real-time market price, just like ordinary equity shares. |
| Various operating expenses are included. | Operating expenses associated with ETF investments are low. |
| Mutual funds have many tax liabilities. | Investment in ETFs offer tax benefits to the investors |
| Investors don’t need to pay any commission to buy and sell mutual funds. | ETFs are traded like other shares on the exchange. Investors are required to pay commission to buy and sell units as per rules. |
What is best for NRIs
People invest their hard-earned money in different financial tools with varying objectives in mind. Achieving your financial goals is one of the most vital tasks to perform. There are several financial tools available to help you achieve your financial goals. Mutual funds and ETFs are amongst the most popular ones. They offer you an opportunity to build a diversified portfolio. Depending on your investment horizon, risk appetite, financial goals, and tax-saving strategy, you can choose between these two options.
SBNRI is an authorised Mutual Fund Distributor platform & registered with Association of Mutual Funds in India (AMFI). ARN No. 246671
There are different types of investment options in India for NRIs; risk, reward and return vary from one another. Because of confusion and additional regulations for NRIs and OCIs, NRIs living away from India may face several challenges. At SBNRI, we understand this struggle. You can download SBNRI App to get assistance with investment for a smooth procedure.
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