Question

Explain the difference between a mutual fund and an exchange traded fund. Discuss load vs no-load funds. How do loads and fees affect investment returns?

Answer 1

Difference between mutual fund and excahnge traded fund:-

(1) Meaning:-Mutual fund is professionally managed fund in which money is pooled from various investors and invested in financial assets.While Exchange traded fund are as the name suggests traded on stock exchange just like stock.We can say that it is a hybrid instrument which is mutual fund but traded like stocks

(2)Disclosure of holding:- In case of mutual funds ,holdings are disclosed on quarterly basis while in case of ETF ,it is disclosed on daily basis.

(3)Fractionality:- Mutual funds can be sold on fractions while ETF cannot be sold in fractions

(4) Management:- As we have discussed above in meaning that mutual fund is professionally managed to outperform market while ETF are traded in secondary market ,therefore they have passive management.

(5)Expense ratio:-It is higher for mutual fund in comparison to ETF.

Load funds are those mutual funds which charge fees like sales fee or commission while No load funds do not charge any such fee if you hold the investment for specified period.

Various loads and fees charged like 12 b 1 fees ,front load ,back load, expense ratio etc affects investment returns or we can say that lowers the return

For example :-Front load is charged when we buy investment and that front load is deducted from investment amount and then net amount is invested . Therefore obviously it will lower return.