Difference Between ETF and FOF
There are different investment funds available in the market such as Exchange- Traded Fund and Fund of Fund. Individuals who are willing to invest in these funds but do not have enough knowledge must read the following sections to decide on which one to invest in.
The upcoming segments contain definitions of Exchange- Traded Fund and Fund of Fund and most importantly the differences between ETF and FOF. Read along!
What Is an ETF?
An Exchange-Traded Fund (ETF) is a fund that tracks the movement of an index, a collection of stocks, or a commodity. Exchange-Traded Funds are listed and traded in the share market, unlike mutual funds. As a result, it offers more liquidity than mutual funds. Moreover, most ETFs follow the equity index.
What Is an FOF?
Fund of Funds (FOF) invests in various mutual fund schemes. The investment portfolio may include mutual fund schemes from different or similar fund houses. The Fund of Funds is customised to meet investors' investment objectives and risk appetites.
FOF Vs ETF: Key Differences
Go through the following differences between ETF and FOF:
| Criteria of Differentiation | ETF | FOF |
| Structure | A diversified portfolio containing a basket of bonds, securities and other stocks and follows an equity index. | FOF includes diversified mutual fund schemes, which are customised to meet the investment goal and risk appetite of an investor |
| Selling Price | There is no Net Asset Value for Exchange-Traded Funds, and they are available at market price. However, ETFs with high trade volume and assets under management bear a market price close to their Net Asset Value. | Fund of Funds is available at their Net Asset Value since they are not traded in the share market. Their NAV is evaluated during the trading day's closing time. |
| Cost | The cost ratio of ETFs is lesser than other mutual funds and is a more affordable investment option than mutual funds, as ETFs are traded in the stock exchange and managed passively. | These are expensive because they are managed actively. Investors may need to bear the management cost and fees for managing a mutual funds portfolio. |
| Liquidity | ETFs provide more liquidity than traditional mutual funds as investors can trade them on the share market like any other shares. | Liquidity is low in Fund of Funds as they are not traded on the stock exchange. |
| Tax Implications | The taxation varies with each ETF, such as Gold and Equity ETFs. | Mutual funds in the portfolio of FOFs are taxed similar to debt funds (non-equity funds) |
How to Choose Between Exchange-Traded Funds and Fund of Funds?
After carefully going through the differences between FOF and ETF, take a look at the factors on which your choice for selecting between these two investment options will depend:
1. Investment Returns
As an investor, you need to perform thorough research and assess the investment strategy, asset allocation, and portfolio before investing in ETFs and FoFs. Your analysis must include understanding your risk appetite. If you are willing to receive higher returns, you may need to bear higher risks. Additionally, volatile investments also can make up for higher returns.
2. Profile of an Investor
You must ensure that your investment profile aligns with three pillars– investment objectives, horizons, and risk appetite. This is an essential parameter to check to get the maximum benefits from investment in ETF or FOF.
3. Portfolio Diversification
Financial experts suggest that investing in diverse asset classes lowers the risk in the investment portfolio. FOFs invest in different mutual funds. Therefore, they will extend a more diversified portfolio than ETFs. In addition, you can avail benefits of expertise and guidance from multiple fund managers while investing in FOF. However, if you are looking for higher long-term returns over portfolio diversification, you can opt to invest in an ETF.
So, weigh up the differences between ETF and FOF and consider the above mentioned factors to make an informed decision before investing in one.
Frequently Asked Questions
Is it compulsory to open a trading and Demat account to invest in FOF?
You don't need to open a trading or Demat account to invest in FOF.
What are the types of ETFs available?
There are several types of ETFs like Bond ETFs, Commodity ETFs, Gold ETFs, Industry ETFs, Inverse ETFs, Currency ETFs, etc.