It has been over three years since there was a big interchange in Indian investment. Online share trading has gone through drastic changes in the stock market. Both ETF and FOF are important topics to know about, and are great investing options to go for. It is important to understand the difference between the two, hence we are going to discuss the same here.
Today we are going to emphasize these two investment options, which are ETF and FOF.
What is ETF?
An ETF is designed to track anything from the rate of individual commodities to a large and varied collection of securities. It can even be designed to track the various investment strategies of the guards. ETFs are favored by investors who search for open-ended mutual funds that can be dealt with on exchange all day. Most of the ETFs track nearly about 85% of the Equity Index. It has a related price, which allows it to be easily purchased and sold.
What is FOF?
A Fund is also a kind of mutual fund that uses its resources to make investments in various types of mutual funds available in the market. It was formed to meet the requirements of lots of people investing in risk and investment goals. It can be used to make investments both domestic as well as international too.
Here are some of the differences between ETF and FOF:
ETFs are mainly a portfolio of securities like mutual funds, where most investments are made in various securities like stocks, bonds, etc… In contrast, FOFs are a basket of mutual funds that make investments in other mutual funds based on risk factors and investment objectives.
An ETF allows trading all day on a stock exchange like a stock. It is an essential element in online share trading. While liquidity is based on the market’s demands, investors search for equilibrium in the trading volume before purchasing. Due to low liquidity, FOF can be traded like an ETF.
As ETFs are dealt with on a stock exchange, it means they are purchased or sold at the value of the market but not the NAV.
If we differentiate the costs, then ETFs are lower priced than FOFs. Usually, the expense ratio of ETFs is 0.5% less as most of the ETFs are passively handled due to the tracking of the index.
Tax is one of the main features when choosing an investment. The implications of taxation on ETFs and FOFs are followed as:
There are three types of ETFs based on tax perspectives: gold, equity and various others. There are a few tax implications:
If the ETFs are held for one year or less, the gains which are earned from capital is known as short-term capital gains. 15% will be the liability tax
If ETFs are held for more than one year, the gains which are earned from capital is known as long-term capital gains. LTCG up to 1 Lakh is released from the tax.
The liability for tax on LTCG more than 1 lakh will be 10% indexation benefits.
Gold and other ETFs:
If the ETF is held for less than three years, the gains which are earned from capitals is known as short-term capital gains. These gains are added to the annual earnings and taxed based on the earning slab rates.
If the ETF is held for one year or more, the gains earned will be defined as long-term capital gains or LTCG. These capital gains will leave a tax of 20% with indexation benefits.
How can ETF and FOF be chosen as an investor?
When you are gazing at the options for investment, a few things have to be kept in mind.
- Returns on investment are equivalent to the risks. If an investment includes higher stakes, it is examined as offering an excellent opportunity to gain higher returns.
- You are choosing an investment based on an investor’s profile. The three pillars of an investment profile are there, such as financial goals, risk tolerance, and your investment period. Your portfolio will work until your investments are in tune with the three aspects.
- FOFs allow offering a unique option of diversification by making investments in other mutual funds. Therefore, you can get the benefits from the expertise and experience of various fund managers. Fund of funds can be accessible in multiple variants, like asset allocation funds, gold funds, international funds, etc. Make sure the choice has been made based on what your portfolio requires. Therefore, they are an excellent substitute for stock investment, not stock trading.
- Both ETF and FOF are handled passively. Therefore, they plan for investors who are searching for investment avenues that are not addressed actively.
ETFs are managed funds, whereas FOF are mutual funds designed to meet the needs of investors who favor actively managed funds. As we can see, there are lots of differences between the two. It is essential to comprehend the difference before making a decision. Investments should be made wisely.