Sunday, January 16, 2011

Difference between ETF and MF

What are the differences between Nifty exchange-traded fund (ETF) and any equity mutual fund? Could you also highlight the pros and cons of both?

ETFs are passively managed funds. The portfolio of an ETF fund is determined by an algorithm and quantitative details about the companies listed in the market. No human judgement enters the decision-making process regarding which stock the fund will hold and in what percentage. General equity mutual funds, on the other hand, are actively managed. These have a fund manager and a team making decisions about all aspects of the portfolio, including what stocks to hold, how much and when to buy/sell.

The advantages of an ETF is transparency and cost. Since there is no active management involved, the costs are lower than actively managed funds. The disadvantage is that due to a specific mandate, there is lack of flexibility in terms of reacting to market conditions or opportunities. In general, actively managed funds have better manoeuvrability since they can make a judgement based on what they observe.

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