Exchange-traded funds (ETFs) and mutual funds are popular investment vehicles in Singapore. They both offer investors the opportunity to diversify their portfolio with a single purchase and professional management of their investments. However, there are significant differences between these two types of funds that investors need to understand before deciding which is better suited for their investment goals and risk tolerance. This article will discuss the significant differences between ETFs and mutual funds in Singapore, exploring key areas.
Management structure
One of the primary differences between ETFs and mutual funds in Singapore is their management structure. Mutual funds are managed by a professional fund manager who makes investment decisions on behalf of investors. Therefore, the fund’s performance is directly affected by the expertise and decision-making ability of the fund manager.
On the other hand, ETFs are passively managed, meaning they track an underlying index or sector and aim to replicate its performance. Therefore, no active management is involved, making ETFs a more cost-effective option than mutual funds. Additionally, investors have more control over their investments in ETFs as they can buy and sell shares directly on the stock exchange during trading hours.
It is important to note that the management structure of mutual funds also makes them less tax-efficient than ETFs because actively managed funds often have higher turnover rates, resulting in more capital gains distributions and taxes for investors.
Investment strategy
Another key difference between ETFs and mutual funds in Singapore is their investment strategy. Mutual funds typically have a specific investment objective, such as growth, income, or a combination. Therefore, the fund manager will actively select securities that align with the fund’s purpose.
On the other hand, exchange-traded funds are designed to track an index or sector, making them a more passive investment strategy. Therefore, ETFs are not actively managed, and the fund’s performance is dependent on the performance of the underlying index or sector. It can appeal to investors who prefer a hands-off approach to their investments.
Investors should also note that the investment strategy of mutual funds can result in higher fees than ETFs because actively managed funds require more resources and research, which are passed on to investors through higher management fees.
Fees and expenses
Fees and expenses are another significant difference between ETFs and mutual funds in Singapore. Mutual funds typically have higher fees, including management fees, sales charges, and redemption fees. These fees cover the cost of actively managing the fund and can significantly impact an investor’s returns.
On the other hand, ETFs generally have lower fees compared to mutual funds because ETFs do not require active management, resulting in lower expenses for investors. ETFs are bought and sold like stocks on the stock exchange, so investors only pay a commission to their broker or online trading platform.
It is also worth noting that mutual funds can have hidden costs, such as 12b-1 fees, which cover marketing and distribution expenses. These fees are only sometimes transparent to investors, making it essential to review a fund’s prospectus before investing carefully.
Liquidity
Liquidity refers to how easily an investor can buy or sell an investment. In this aspect, ETFs have a significant advantage over mutual funds in Singapore. Since ETFs can be bought and sold on the stock exchange during trading hours, investors have more liquidity and flexibility with their investments.
On the other hand, mutual funds have specific redemption periods, usually once a day after the market closes. Therefore, if an investor wants to sell their mutual fund shares, they can only do so at the end of the day, which may only sometimes be an ideal option.
It is also worth noting that ETFs can be traded on margin, meaning investors can borrow money to invest in them. It can increase the potential return on investment for ETFs compared to mutual funds.
Risk and return
Risk and return are important considerations for investors when choosing between ETFs and mutual funds in Singapore. Mutual funds are generally considered less risky compared to ETFs because a professional fund manager actively manages them. The fund manager’s expertise and research aim to minimise risk and maximise returns for investors.
On the other hand, ETFs have a more passive approach, making them potentially riskier than mutual funds. However, since ETFs track an index or sector, they also offer the potential for higher returns compared to mutual funds over time. It is crucial for investors to carefully assess their risk tolerance and investment goals before deciding between ETFs and mutual funds.
It is also worth noting that ETFs and mutual funds can have different levels of risk within their respective categories. Therefore, investors must research and compare specific funds before making an investment decision.