Stocks, Exchange-Traded Funds (ETFs), and mutual funds are popular types of instruments that people usually invest in. Each investment option comes with its unique features, advantages, and disadvantages Stocks vs ETFs.
ETFs offer flexibility and enable easy diversification. Mutual funds are managed by professionals with specific investment strategies. Stocks offer promising returns and greater control.
This blog will provide a detailed understanding to help investors select the best option before making a decision.
What are ETFs, Stocks, and Mutual Funds?
Exchange-Traded Funds (ETFs) are a type of investment that follows the performance of a specific index. It can be Nifty or BSE Sensex or even other assets such as commodities or bonds. The working of ETFs is like that of regular stocks allowing investors to buy or sell shares throughout the trading day.
Stocks, also called Equities, are a type of security that refers to ownership in a company. Companies generally issue stocks to pay off debt, launch new products, or expand their functioning. There are two main types of stocks, namely, Common Stocks and Preferred Stocks.
A mutual fund collects funds from investors to invest in a collection of stocks, bonds, or other investment securities. These funds are classified on the basis of what they invest in, their goals, and the type of returns they aim to achieve.
You can invest in all these instruments using online investing.
Which One Is the Better Investment?
Here are certain factors that must be considered before investing in stocks, mutual funds, and ETFs.
| Categories | Stocks | ETFs | Mutual Funds |
| Diversification | Diversification is only possible if a particular stock allows it. An investor can invest in multiple sectors to enhance diversification. | ETFs are less diverse because they are targeted and mirror a particular index. | Mutual funds expose investors to a broad range of securities. Investment can be spread across multiple sectors, asset types, and industries. |
| Risk Factor | Performance of a share depends on the performance of a company and global market condition which makes it very risky. | ETFs are comparatively less risky and more transparent. Holdings are disclosed every day which enables an investor to make informed decisions. | Mutual funds are volatile in nature as they are based on their investment. Their performance is based on underlying assets and other external factors that create constant price shifts. |
| Trading and Liquidity | Stocks are liquid and can be sold or traded according to an investor’s wish and will. | ETFs are as liquid as shares because they can be traded like stocks throughout the day. | Mutual Funds are less liquid than ETFs and shares as they can be traded only at the end of the day. |
| Cost Structure | Investors have to pay brokerage commissions and taxes on trades but long-term costs are low. | Investors might have to pay brokerage commissions and bid-ask spreads when buying or selling ETFs. However, the overall costs are low. | Mutual funds have higher costs. Management fees and expense ratios reduce the overall returns over a period of time. |
| Size of Investment | The price of a single share can be as low as a few rupees and can go up to thousands. | There is no minimum investment required for an ETF. However, an investor must purchase at least one unit that is usually worth a few hundred rupees. | Mutual funds can be an expensive option as lump-sum investments can range from Rs 5000 to Rs 10,000. However, the minimum investment required for a Systematic Investment Plan is Rs 100 to Rs 500. |
Conclusion: Stocks vs ETFs
Every new investment strategy comes with its own set of benefits. Stocks, Exchange-Traded Funds, and Mutual funds are reliable options as long as they align with your investment goals. Therefore, make sure that you are clear in your mind, select the best investing app,and research thoroughly.
