Differences Between ETF and MF

ETF vrs MF
 Major Differences
• ETF • MF
• ETFs are traded like • Mutual Funds are
stocks in stock purchased and sold thru
exchanges distributor or directly
• ETFs are passively from AMCs
managed funds • MF are actively
managed funds which
means portfolio is
revised continuously
 ETF
• ETFs are traded like stocks
any time a day
• No minimum initial
investment needed in ETFs.
It can be purchased for the
price of a single unit.
• ETF fees/cost/expense ratio
is low since it is passively
managed
MF
• MFs are traded at the end
of each day when market
closes at closing NAV
• Minimum initial investment
of Rs. 5000/- (500 units
*Rs.10/- FV) required for
most of MF schemes.
• MF fees/expense ratio is
high since it is actively
managed
 ETF
• ETF is tax efficient since
investor can control the
buying and selling time
period.
• ETFs are more liquid since it
can be traded any time.
MF
• MFs are not tax efficient
since investors do not have
control over fund manager’s
decision of buying and
selling of securities in the
portfolio thereby paying
capital gains tax.
• MFs are less liquid (End of
the day trading)
 ETF
• ETFs track their underlying
index with minimal tracking
error
• Demat and trading accounts
are required for ETF trade
MF
• MF’s performance depends
on the performance of its
underlying assets
• Demat and trading accounts
not required for MF trade.
 ETF
• Any asset class can be used to create ETFs
• ETFs are of three types :
Index ETF/Fund
Gold ETF
Liquid Fund ETF
• An Index ETF is one where the underlying is an
index, say NIFTY
• Gold ETFs are special type of ETF which invest
in gold and gold related securities. This
product gives investor an option to diversify
his investments into a different asset class,
other than equity and debt
• Holding physical gold has the following
disadvantages :
Fear of theft
Wealth tax
No surety of uality
Changes in fashion and trend
Locker costs
Lesser realisation on remoulding of ornaments
• In case of gold ETFs, investors buy units which
are backed by gold. Thus, every time investor
buys one unit of G-ETFs, certain fixed quantity
of gold being earmarked for him somewhere.
• Thus G-ETF units are as good as gold.
• For example,
1 G-ETF = 1gm of 24 carat gold
U buy 1 G-ETF every month for 10 years
Then after 10 years, U hold 120 gms of gold
U can convert G-ETFs into 120 gms of gold bu
approaching MF or
Sell the G-ETFs in the market at the then
market price and buy 120 gms of gold
• Thus G-ETF is equivalent of holding gold in
paper form
• G-ETFs are an open ended scheme
• Investors can buy & sell units any time at then
prevailing market price
• AMC of MF is required to buy gold of specified
quantity based upon the no. of G-ETF units
sold from investor’s money
• The gold which Authorised Participants (AP), who
are typically large institutional investors deposit
with AMC for buying the bundled ETF units is
known as Portfolio Deposit.
• This Portfolio Deposit has to be kept with the
custodian who handles the physical gold for AMC
and ensures its safety.
• The custodian maintains record of all the gold
that is deposited and withdrawn under the G-ETF.
• An account is maintained for this purpose
which is known as “Allocated Account”.
• Custodian enters on a daily basis the inflows
and outflows of gold bars from this account.
• The money which the AP deposits for buying
the bundled ETF units is known as “Cash
Component”. The cash component is paid to
AMC.
• The cash component is not mandatory and is
paid to adjust the difference between
applicable NAV and the market value of
portfolio deposit.
• Thus, to summarize, Authorised Participants
(APs) pay portfolio deposit and cash
component to get creation units in return
from AMC
 Market Making by APs
• APs are market makers and continuously offer
two way quotes.
• The differential is their earning which is known as
bid-ask spread.
• They provide liquidity to ETFs buy continuously
offering both bid and ask quotations
• Bid quote – 999
Ask quote – 1001
Thus, Rs 2/- per unit is the profit of AP
 Custodian
• The custodian maintains record of all gold that
inflows and outflows of scheme’s portfolio
deposit
• Makes respective entries in the Allocated
Account thus transferring gold into and out of the
scheme daily.
• Custodian buys insurance for the gold held.
• Charges fees from AMC for services rendered and
insurance
• This expense contributes to tracking error
 Tracking Error
• The difference between return given by gold
and those delivered by scheme is known as
Tracking Error
• It is defined as the variance between the daily
returns of the underlying (Gold here) and NAV
of the scheme.
• Tracking error should be as low as possible
• It’s a measure of performance of ETF.