Mutual funds vs. Exchange-traded funds (ETFs)
Understanding the differences between mutual funds and exchange-traded funds (ETFs) can help you work out which type of investment is right for you.
Many mutual funds and ETFs are similar, and both offer a way to diversify your portfolio and grow your money over time. But the way they work and are traded sets them apart.
Understanding these differences can help give you the knowledge to choose which is right for you and your financial goals.
As with any type of investing, both mutual funds and ETFs do come with risk, and the value of your investments can fall as well as rise.
Key points
- Mutual funds pool investors’ money to buy a range of assets and are managed by professionals; they’re priced once a day.
- ETFs are similar but traded on stock exchanges like shares, allowing real-time buying and selling.
- Mutual funds often suit regular, hands-off investors who want expert management.
- ETFs are typically lower cost, more flexible, and could be better for those wanting more control and live pricing.
- Both options can help to diversify your investments, but the best choice depends on your goals and how involved you want to be.
What are mutual funds?
Typically, mutual funds pool money from many investors to buy a wide range of assets, including shares , bonds, or property. Rather than buying one individual share, you’re buying a group of assets and their combined value.
There are different types of mutual funds to suit various goals. Actively managed funds, for example, aim to outperform the market with expert decision-making and they're usually overseen by at least one fund manager. Tracker funds (index funds) aim to follow the performance of a specific index like the FTSE 100 and are known as passive funds, as they are not actively managed by a fund manager.
You’ll also find multi-asset funds, which spread risk across different investment types and are well-diversified. As well as this, there are income funds which are designed to pay out regular returns, and funds that take environmental, social and governance (ESG) factors into consideration, single-asset funds, and funds that focus on a particular sector or region.
Whether you're looking for growth, income, and to invest in line with your values, there's likely a fund that fits your needs.
What are ETFs?
ETFs are like mutual funds but are traded on a stock exchange, just like shares. They typically aim to track the performance of a market index (like the FTSE 100 or S&P 500), though some are actively managed.
With ETFs, you can buy and sell almost instantly at their live prices, just like shares. And like shares, you may pay a trading fee when buying or selling, rather than ongoing fund management charges. Depending on how much you choose to invest, this can make your overall investment charges cheaper.
One of the key differences with mutual funds is when and how you can place trades, and the costs associated with investing in them. Mutual funds are valued and priced once per day. When you place an order to buy or sell units, it may take a few days for the trade to complete (depending on the provider). The price you pay for your units is fixed at the valuation point when your order is processed, even if the market moves before settlement.
Key differences
| Feature | Mutual funds | ETFs |
|---|---|---|
| Management | Actively or passively managed | Mostly passive, some active |
| Trading | Once a day after the market has closed | Throughout the day. Subject to market fluctuations |
| Fees | May be higher due to active management | Typically lower, but may include trading costs |
| Access | Ideal for regular monthly investing | Great for lump sums and DIY investors |
| Flexibility | Less flexible | Highly flexible when buying or selling |
| Minimum investment | Often low | Depends on broker/platform |
Which type of investor might benefit from mutual funds or ETFs?
Mutual funds may suit you better if:
- You prefer a hands-off approach.
- You want expert fund managers to make decisions and so want to invest in an actively managed fund.
- You’re investing regularly (e.g. monthly via direct debit).
- You’re new to investing and want simplicity.
ETFs may suit you better if:
You want more control and flexibility.
- You’re comfortable using online trading platforms.
- You’re investing a lump sum.
- You want to keep costs low and see live pricing.
Both funds and ETFs can offer great ways to invest for the long term. The best choice depends on your goals, how involved you want to be with buying and selling, how you want to pay for your investments and your comfort with risk.
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