Investment in the stock market and mutual funds is increasing as people seek better returns. Additionally, investors have many options to invest their money. One of these options is the Exchange Traded Fund (ETF). In simple terms, an ETF is an investment option that allows you to invest in the stock market. Through this article, we will provide a complete guide to help you make the right investment.
ETF vs Mutual Fund: Understanding the Differences
Mutual Funds: A Collective Investment Scheme
A mutual fund is a collective investment scheme where money is pooled from multiple investors and deposited into one fund. The fund manager then invests this collected money in various securities and assets. Investors can purchase units of a mutual fund, which are managed by asset management companies (AMC). Mutual funds are typically classified into three categories based on asset allocation strategies: equity funds, debt funds, and hybrid funds.
ETFs: Track a Specific Index
ETFs (Exchange Traded Funds) are passive investment funds that trade on stock exchanges, making them popular for their flexibility and low costs. ETFs generally track specific market indices and allow investors to buy and sell a set of shares on stock exchanges. Unlike mutual funds, which must be purchased directly from a fund house, ETFs are traded like individual stocks on exchanges.
Taxation of ETFs
Tax on Dividend Income:
Dividend income is subject to taxation as part of the investor’s annual income. Before the financial year 2020-2021, a 15% Dividend Distribution Tax (DDT) was applicable on all dividends. However, from the financial year 2020-2021 onwards, DDT was abolished, and now dividend income is taxed according to the investor’s income tax slab.
For Equity ETFs:
Equity ETFs primarily invest in stocks or related financial instruments. The tax structure for capital gains from these ETFs is the same as that on individual stock investments.
Which one is suitable for Middle-Class People in India?
For middle-class investors in India, mutual funds are generally more suitable. They offer professional management, a variety of options (equity, debt, hybrid), and easy investments through SIPs. They also provide tax benefits (like ELSS). ETFs, while cost-effective with low fees, are better for those who have stock market knowledge and prefer flexibility and liquidity. If you’re new to investing, mutual funds are a safer and simpler choice, while ETFs suit experienced investors. Always match the choice to your risk appetite and financial goals.
Disclaimer: Investment in mutual funds or ETFs is subject to market risks. Before investing, please consult a certified investment advisor. Timesbull does not take responsibility for any profits or losses incurred.