Money Masterclass with Feroze Azeez | Mutual Funds vs ETF

Mutual fund investments come in various options. Choosing the right category is important to meet life goals. Feroze Azeez, deputy CEO, Anand Rathi Private Wealth, decodes them.

Equity Vs debt funds

If an asset management company collects money and invest in stocks, it is called Equity Mutual Fund. If the money is invested in bonds or FD-like instruments, it is called a Debt Fund. “Equity is nothing but being partners to corporates. Debt is nothing but lending to corporates. So the risks are different. The risks in equity are higher than in debt because you’re lending in debt, you’re becoming partners in equity,” Azeez says.

Who should invest in which category?

According to Azeez, everybody should invest in both equity and debt funds. The nitty-gritty, he says, is in the proportions. Depending on the stage of life, the risk appetite and one’s life goals.

“Equities have a potential of delivering a significantly better return than debt over a long period of time. Debt is low risk, low return. The expectation from a debt fund from a three-year investing perspective should be between 5% and 7% a year. On the equity side, looking at where we stand in the economy and this post-pandemic world, the expectation would be double-digit on a three-year investing period. So a 12%, 13% expectation wouldn’t be unfair from an investor’s standpoint,” he added.

For those who may find it tedious to manage two funds and rebalance the equity and debt proportions, there’s a category called Hybrid Funds, that offers part equity, part debt.

“In the hybrid fund category, you have different sub categories, depending on the proportion between equity and debt. If a person does not want to make this decision on a regular basis on how much in equity, how much in debt, then you go in for a hybrid fund,” Azeez said.

Are Equity Traded Funds also mutual funds?

Yes. ETF is nothing but a mutual fund. It is a sub-category of a mutual fund, which gets traded on the exchange. The difference between ETF and a normal mutual fund is the way in which you transact. A mutual fund has subscription in physical form or in digital form with the asset management company who invests the money of the investor. You need not have a Demat account for buying a normal mutual fund too. However, in the case of ETF, a broker and a Demat account come into play.

“If I want to invest thousand rupees in an open-ended equity mutual fund, not an ETF, I will give an application to the asset management company and I’ll get the units. In an exchange traded fund, I have to take this money to a broker, the broker punches an order, just like a stock on the exchange and gets the desired units in my Demat account. So exchange traded, as the name suggests, trades on the exchange. The rest of the mutual funds are bought and sold through the asset management company, not directly on an exchange,” Azeez says.