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<div type="image" title="Are Indians depositing less money in banks, or more in mutual funds? Turns out, it&amp;#39;s neither of those." msid="113663806" hostid="261" sizebytes="1121785"></div><br />Over the past few months, there’s been a lot of brouhaha about the lagging pace of <keyword id="20202062" type="General" weightage="20" keywordseo="bank-deposits" source="keywords">bank deposits</keyword> in India. Simply put, the rate at which Indians are depositing their hard-earned money in banks has been falling constantly, and some blame the increasing financialisation of <keyword id="20751315" type="General" weightage="20" keywordseo="household-savings" source="keywords">household savings</keyword> in the country or the rising preference of Indians towards <keyword id="19929240" type="General" weightage="20" keywordseo="mutual-funds" source="keywords">mutual funds</keyword> and shares. <br /><br />So, the hypothesis is that people are choosing to invest more in mutual funds and the Indian <keyword id="19949641" type="General" weightage="20" keywordseo="equity-markets" source="keywords">equity markets</keyword> through direct investments, IPOs, or NFOs, the money flowing into Indian banks in the form of deposits is slowing down. But is that really the case? <br /><br /><h2>A crisis or a phase?</h2><keyword id="19899808" type="General" weightage="20" keywordseo="RBI" source="keywords" meta.keywordsubtype="org" meta.entityname="RBI" meta.hostid="261" meta.entityid="RBI">RBI</keyword> data suggested that for the quarter ended June 2024, bank deposits grew at 11.7%. On the other hand, credit growth has outpaced this at 15%. This means that the outflow from banks as loans is far greater than the inflow into them in the form of deposits in Q1 of FY 2024-25.<br /><br />The situation largely saw cut-copy-paste in the first week of September as well, with loans registering a 13.3% YoY growth during the period, while deposits rose only 11.1%. This gap has only been widening for the last 3 years. <br /><br />Since deposits are how banks gather assets to further lend and earn interest income as a consequence, even a slight dip could set the alarm bells ringing for banks, and rightfully so. <br />And truth be told, mutual funds are indeed taking on bank deposits in a big way. Per a report by Franklin Templeton, in August 2024, the AUM (assets under management) of Indian mutual funds, or the total funds managed by them, stood at 31.3% of total bank deposits in the country, up from 24.20% during the year-ago period. As of August 2024, the AUM of mutual funds stood at Rs 66.17 lakh crore, an all-time high.<br /><br />But all said and done, is this really the reason why the rate of bank deposits is falling behind? SBI has dismissed this to be a “statistical myth”, and experts point out that since equity and fund houses also keep the cash in their respective bank accounts, there’s no cause for concern. <br /><br />So, is financialization really to be blamed for the trailing tempo of deposits? Or is something else happening behind the scenes? We take a closer look:<br /><br /><h2>First, are household deposits really slowing down? And is that a cause of concern?</h2>Data from Motilal Oswal suggests the contrary. Deposits grew by around 10.4% between March 2020 and August 2024. Data from RBI also highlights that as of August 9, 2024, bank deposits witnessed a YoY growth of 10.8%. The loan-to-deposit ratio for the retail segment, which indicates what percentage of its total deposits the banks lend out as loans, has stayed at 77.5%, above the 77% mark for the tenth straight month.<br /><br /><div type="image" title="Yes, household deposits (as % of total deposits) have dipped, but the drop is far from significant" msid="113663882" hostid="261" sizebytes="306706"></div><br />Also, we can’t forego the fact that the share of Indian households in bank deposits has indeed slowed down. However, data from Axis AMC shows that the dip is marginal—from 63% in 2022 to 62% in 2023 and 61% in 2024. What has slowed down even more considerably is the share of government deposits in the aggregate bank deposits, which has dipped from 14% in 2018 to 9% in 2024. So, it's not just household deposits, you see. <br /><br />Moreover, as of March 2024, the collective CASA ratio (current and <keyword id="114757" type="General" weightage="20" keywordseo="savings-account" source="Orion">savings account</keyword> deposits) of all commercial banks in India stood at 41.00%, down from 43.1% in March 2023 and 45.2% in March 2022, marking a nearly 5% point decline over the past year, while still staying over the 10-year average of 39.2%. This implies that Indian banks are relying more on higher-cost funds (savings accounts), which can limit their profitability. <br /><br /><h2>What is this financialisation of savings we are talking about?</h2>Then again, there is no doubt about the growing affinity of Indians towards mutual funds and stock markets. Recent data from CBDT (Central Board of Direct Taxes) highlights that India’s net direct tax collection surged by around 22%, driven exclusively by the significant uptick in the collection of Securities Transaction Tax (STT), which doubled to Rs 26,154 crore, from Rs 13,352 crore in the year-ago period.<br /><br />Why does this matter? STT is levied when you buy or sell equity shares on stock exchanges, sell <keyword id="6361918" type="General" weightage="20" keywordseo="equity-mutual-funds" source="Orion">equity mutual funds</keyword>, and trade in futures and options in the equity segment. Such taxes, including the multiple other taxes in equity market investments, are considered as leakages as the money moves out of the economy into government coffers.<br /><br />Data from a ValueQuest report explains that over the last 20 years, the markets have handsomely rewarded the investors, generating over $900 billion in incremental value for them. This is the major driver behind the dramatic rise in investment flowing towards the equity markets.<br /><br />There’s further proof of this budding romance, if you check the demat pudding. The number of demat accounts, which are a primary requisite for participating in the stock markets, also burgeoned by 42.3 lakh in August 2024, taking India’s total tally of demat accounts beyond 17 crore. To put this in perspective, this is almost equivalent to the population of just 8 nations in the world, including China, the US, Brazil and more. <br /><br />Vivek Iyer, Partner, Grant Thornton Bharat thinks it's rather important, as well. “Financialisation of household savings in India is an indication of deepening capital markets in the market, especially from a retail investor standpoint. Bank deposits with a modest rate of return are no longer the only option for savings for investors. Investors today have more avenues for wealth creation in the form of public capital markets, which have democratized wealth creation and provided equality of opportunity to retail investors”, he says. <br /><br />Yes, Indians are investing more and more in the markets, and in mutual funds. But is it a sin to look out for inflation-beating returns, which the stock markets offer, and vanilla bank deposits don't? After all, the allure of 12-13% annual returns offered by <keyword id="45369" type="General" weightage="20" keywordseo="equities" source="Orion">equities</keyword> can certainly pale the stability offered by good old deposits, which generally do not go beyond 9% when it comes to annual returns.<br /><br />But all of this is not what is behind the slowdown. India is still a toddler in the school of savings financialization, with less than 10% of the population holding a demat account, and less than 5% of us saving in equities. That's a drop in the ocean of deposits, far inadequate to trigger a tsunami. <br /><br /><h2>Tell me why lagging deposits have nothing to do with Indians investing more in mutual funds!</h2>Says Shweta Rajani, Head - Mutual Funds, Anand Rathi Wealth Limited, “Households' equity holdings composition grew from 11.1% in FY 23 to 14.7% in FY 24. This trend reflects a growing awareness of investment options, empowering individuals to take control of their financial futures. Despite this transition towards equities, banks still hold a significant share of household financial savings—33.5% in FY24 compared to 34.9% in FY23”.<br /><br />Also, household savings and their subsequent financialization do not have much to do with deposit creation, which is entirely made by banks. What actually drives increased deposits is credit growth or increased lending. When interest rates are eased, people tend to borrow more and spend more, which circulates more money in the economy. <br /><br />For the past 4 years, RBI has been tightening the screws on interest rates, which raises the cost of borrowings, and makes it more expensive to take loans, putting a dampener on credit growth, but effectively curbing inflationary pressures. <br /><br />The last time RBI cut the repo rate by 40 basis points was back in May 2020, 4 years ago. The lag in <keyword id="19998084" type="General" weightage="100" keywordseo="deposit-growth" source="keywords">deposit growth</keyword> we’re witnessing is almost 3 years old. Coincidence much, or just good old economics at work?<br /><br />But with the Fed recently setting a rate cut precedent by slashing 50 bps off its interest rate, RBI is expected to follow suit in the next MPC (Monetary Policy Committee) meeting, scheduled for November 2024. <br /><br />A rate cut would ease the aforementioned high cost of borrowing, and increase loan-taking for corporates and institutional investors, thereby stoking consumption in the economy. And then, deposit creation in banks is likely to return to its former glory. <br /><br />If not, then that would be a curious case to unravel! But that worry is for another day.<br /><br /><em><i>Do you have insights or personal experience to share on your personal finances or money? Contact us at </i><i><a target="_blank" class="c-link" href="mailto:businessinsider@timesinternet.in">businessinsider@timesinternet.in</a></i></em><i><em>.</em></i><br />

Simply Put: A Deposit Dilemma — What's the fuss about a crisis in Indian bank deposits? Are mutual fund investments to blame?

<ul class="summary-list"><li>The best-performing mutual <keyword id="86852" type="PERSON" weightage="60" keywordseo="fund-managers">fund managers</keyword> of 2020 earned their success by foreseeing big investment themes that benefited from the pandemic.</li><li>Business Insider interviewed the nine top performers in the US, and the five in Europe, to learn about their strategies and what they have up their sleeves for 2021.</li></ul><p>COVID-19 changed the world - and it also accelerated many trends that were already underway in the version of society that existed beforehand.</p><p>Several investors who outshined their peers this year had the foresight to plug into trends that became essential for our new reality. That's what Business Insider's <keyword id="35175" type="ORGANIZATION" weightage="60" keywordseo="investing">investing</keyword> team learned as we interviewed the top-performing mutual fund managers of 2020 in the US and Europe. </p><p><keyword id="6354298" type="DEFINITION" weightage="60" keywordseo="Stocks">Stocks</keyword> like vaccine developer <a href="https://markets.businessinsider.com/stocks/mrna-stock">Moderna</a> (+700% this year) and streaming service <a href="https://markets.businessinsider.com/stocks/roku-stock">Roku</a> (+129%) were already big holdings in their portfolios. A relatively obscure biotech company was the largest holding for <a href="https://www.businessinsider.com/category/dennis-lynch">Dennis Lynch</a>, the top performer this year and a frontrunner for the last decade.</p><p>And as ARK Invest's <a href="https://www.businessinsider.com/category/cathie-wood">Cathie Wood</a> said, "so many trends that were well in place before the COVID crisis have gained so much more traction. Because of that, our companies have outperformed significantly."</p><p>Some of the big <keyword id="6357440" type="DEFINITION" weightage="60" keywordseo="Stock-Market">stock market</keyword> winners were not direct pandemic beneficiaries. Tesla's seemingly unstoppable rally created breakout performances for multiple portfolio managers. And in <a href="https://www.businessinsider.com/stock-market-outlook-2021-top-europe-investors-fund-managers-picks-2020-12">Europe</a>, where the likes of Tesla and its 600%-plus gain this year are scarcer, fund managers used old-fashioned fundamental analysis to find cheap yet promising stocks.</p><p>In addition to learning about what worked this year, we asked these pros for their 2021 outlooks: investment ideas they expect to continue reaping from, and new frontiers they are exploiting to maintain their chart-topping performance.  </p><h2><a href="https://www.businessinsider.com/top-wall-street-investors-of-2020-stock-picks-2021-outlook-2020-12">Read our interviews with the 9 best-performing stock pickers in the US here</a>.</h2><h2><a href="https://www.businessinsider.com/stock-market-outlook-2021-top-europe-investors-fund-managers-picks-2020-12">Read our interviews with the 5 top fund managers in Europe here</a>.</h2>

The best stock-pickers in the US and Europe reveal the secrets to their success in 2020 - and share their highest-conviction bets for 2021

<ul class="summary-list"><li>An <keyword id="162921" type="PERSON" weightage="60" keywordseo="expense-ratio">expense ratio</keyword> is a fixed fee mutual funds and exchange-traded funds (ETFs) charge investors to cover operating costs. </li><li>Actively managed mutual funds tend to charge higher expense ratios than passively managed ETFs.</li><li>While relatively small — typically ranging from .25% to 1% — expense ratios can significantly affect a fund's return, especially over time.</li></ul><p>Mutual funds and exchange-traded funds (ETFs) are valuable tools for long-term investment. They are managed by professionals whose main focus is building the value of the fund, helping you diversify your portfolio, and enabling you to buy into companies and securities that you may not have been able to on your own.</p><p>As beneficial as it is to invest in these kinds of funds, here's the thing: They also cost money. Though both <a href="https://www.businessinsider.com/how-to-invest-in-mutual-funds-step-by-step-guide" target="_blank" rel="noopener">mutual funds</a> and <a href="https://www.businessinsider.com/personal-finance/what-is-an-etf-exchange-traded-fund" target="_blank" rel="noopener">ETFs</a> are considered low-cost investment products, you'll find a number of fees associated with managing a fund on your behalf. </p><p>The main fee you should know before signing any paperwork? The expense ratio. Here is a closer look at the role of expense ratios and what you need to know when evaluating buying into a fund. </p><h2>What is an expense ratio?</h2><p>An expense ratio is a fee that covers the total cost of the annual operating expenses for investing in a mutual fund or an <keyword id="6357062" type="DEFINITION" weightage="60" keywordseo="ETF">ETF</keyword>. It is expressed as the percentage of your investment that goes back to the fund.</p><p>You may also see these fees listed as "annual fund operating expenses." </p><p>Expense ratio is an umbrella term that can include <a href="https://www.sec.gov/investor/alerts/ib_fees_expenses.pdf" target="_blank" rel="noopener">a number of different fees</a> that help keep the fund working for you, including:</p><ul><li>Portfolio management</li><li>Administrative and maintenance costs</li><li>Distribution or transfer of assets </li><li>Legal and accounting expenses</li></ul><p>While the expense ratio is the main fee you should know, it's not the only one. Expense ratios don't include transactional fees or costs related to sales, such as shareholder fees charged to buy or sell fund shares or to compensate brokers. They are strictly operational expenses. </p> <p>Expense ratios for ETFs tend to be lower than those for mutual funds. One reason for this is that many ETFs basically mimic the holdings of major indexes, which means they don't need as much attention by an investment professional. Many mutual funds also follow this approach, but others are more active in researching and investing assets. These funds use more time and resources and the expense ratio is usually higher as a result.  </p><h2>How expense ratios are calculated</h2><p>Expense ratios are calculated as a percentage of average net assets that are being managed.  </p><div type="image" title="The expense ratio equation" height="719" width="1667" msid="79377008" hostid="261"></div><p>For example, if you have $20,000 in a mutual fund that has an expense ratio of 0.5%, your operational fees would be $100 for every $20,000 invested. The amount would be deducted from your fund's assets.         </p><p>This may not seem like much to pay a financial professional to grow your investments. But when you're looking at maintaining a fund for decades, a few expense ratio points can translate into large differences in net assets. </p><p>Consider this example. You have four mutual funds, each with $20,000 in assets and a different expense ratio: 0.25%, 0.50%, 0.75% and 1.0%. Assuming each earns a 5% annual return and no additional contributions are made to the funds, a 0.25% difference in expense ratios results in thousands more paid in operational fees, with a significant impact on the funds' growth. At the end of 20 years, each fund would be worth:</p><ul><li>Fund 1:  <strong>$50,595.35</strong> (.25% expense ratio)</li><li>Fund 2: <strong>$48,234.28</strong> (.5% expense ratio)</li><li>Fund 3: <strong>$45,978.13</strong> (.75% expense ratio)</li><li>Fund 4: <strong>$43,822.46</strong> (1% expense ratio)</li></ul><p>Though expense ratios are a necessary evil of investing in managed funds, the percent charged varies from fund to fund. Investor demand has caused more competition among fund providers and has resulted in a <a href="https://www.morningstar.com/lp/annual-us-fund-fee-study" target="_blank" rel="noopener">20-year downward trend in average expense ratios</a> in the US. </p><p>You can research different funds offered by investment companies, such as Vanguard or Fidelity, and comparison-shop funds that offer the most benefit for the lowest rates. Another option is working with a <a href="https://www.businessinsider.com/what-is-a-cfp-certified-financial-planner" target="_blank" rel="noopener">financial planner</a> or <a href="https://www.businessinsider.com/what-is-a-registered-investment-advisor-ria" target="_blank" rel="noopener">registered investment advisor</a> who can help guide you toward products that make sense for your goals. Some things to look out for include:</p><ul><li>How far is the expense ratio above or below the industry average?</li><li>How does the expense ratio dovetail with those of similar funds or fund families? </li><li>How much involvement will the portfolio manager have with investing the fund's assets? More involvement usually means higher fees. </li><li>What other services will the firm provide during the course of managing your fund?</li></ul><h2>What is a good expense ratio?</h2><p>Finding the national average for expense ratios is a good place to start when evaluating whether or not you're being charged a good rate. According to independent investment research firm Morningstar, the 2019 average asset-weighted expense ratio in the US was 0.45%. </p><p>You should also take a fund's management approach into consideration. As discussed earlier, funds are managed either passively or actively, which results in different expectations for a good expense ratio: </p><ul><li><strong>With passive management,</strong> the fund aims to keep pace with specific indexes, such as the S&amp;P 500. Trades and management of the portfolio don't require much time or attention, which is why they're considered passive and generally have lower expense ratios. The 2019 average for passive funds was 0.13%.  </li><li><strong>With a fund that is actively managed, </strong>the portfolio manager invests time and resources to find the best securities to deliver the desired return. Costs for this level of management are understandably more than with a passive management option. The 2019 average for active funds was 0.66%.</li></ul><p>These averages are a good yardstick to use when evaluating funds. However, you may find that many larger investment firms are able to provide rates markedly lower than the national average, says Daniel Patterson, a certified financial planner and owner of <a href="https://www.sweetgrassfp.com/" target="_blank" rel="noopener">Sweetgrass Financial Planning</a> in Mount Pleasant, SC. </p><p>For example, Vanguard's average expense ratio is 0.10% and Fidelity is currently offering some passive index funds with 0% expense ratio. Patterson says this is possible because such firms have enormous resources that enable them to recoup expenses through avenues other than client fees. </p><h2>Where to find your fund's expense ratio</h2><p>Investment firms are required to provide a prospectus when you use their services to buy shares of a fund or other types of investment products. A prospectus is a document that discloses all of the fees and expenses, performance, risks, goals, and other vital information about a fund. This is the document that will show you the expense ratio for your fund. </p><p>Firms are also required to provide shareholders with semi-annual and annual reports that show how their funds and investments are performing. There should be a listing of expenses charged and paid on these reports and a breakdown of how those numbers were calculated.     </p><h2>The financial takeaway</h2><p>Every mutual fund has expenses associated with it and you will find an expense ratio for every kind of managed fund. The expense ratio consists of annual fees that are charged to pay for the operational expenses for your fund. This is usually a percentage of the annual net assets in the fund and is deducted directly from the fund's gross assets. You will get a report from your investment firm twice a year that discloses how much your fund has made and what expenses have been paid. </p><p>Like many other financial products, funds are priced competitively. You may find large differences in fees and performance from fund to fund. But even a small difference in a fund's expense ratios can result in significantly more fees paid or saved over time.</p><p>If you're not clear about what fees you'll be charged as a shareholder, always ask. In the end, take stock of what your investment goals are and choose the fund that makes the most sense for your situation and investing timeline.</p><h2>Related Coverage in <a href="https://www.businessinsider.com/investing-reference" target="_blank" rel="noopener">Investing</a>:</h2><h3><a href="https://www.businessinsider.com/rule-of-72" target="_blank" rel="noopener">The Rule of 72 is a quick, simple way to figure how long it'll take for your savings and investments to double in value</a></h3><h3><a href="https://www.businessinsider.com/what-is-compound-interest" target="_blank" rel="noopener">Understanding the way compound interest works is key to building wealth or avoiding crushing debt. Here's how to make it work for you</a></h3><h3><a href="https://www.businessinsider.com/what-is-an-index-fund" target="_blank" rel="noopener">What is an index fund? A low-cost, low-risk way to invest in the stock market</a></h3><h3><a href="https://www.businessinsider.com/passive-investing" target="_blank" rel="noopener">Passive investing is a long-term wealth-building strategy all investors should know — here's how it works</a></h3><h3><a href="https://www.businessinsider.com/what-is-diversification" target="_blank" rel="noopener">What is diversification? A portfolio strategy that uses a variety of investments to limit risk</a></h3>

What is an expense ratio? The most important fee to know when investing in mutual funds or ETFs

<ul><li><strong><keyword id="1542607" type="PERSON" weightage="60" keywordseo="Will-Danoff">Will Danoff</keyword>, manager of the $230 billion <keyword id="1543323" type="PERSON" weightage="60" keywordseo="Fidelity-Contrafund">Fidelity Contrafund</keyword>, <a href="https://www.bloomberg.com/news/articles/2020-09-17/even-fidelity-s-230-billion-star-danoff-has-robinhood-anxiety?sref=P6GaGUEI" target="_blank" rel="noopener">told Bloomberg</a> that there's a "demographic issue" for mutual funds: Gen Z is not very interested in owning them. </strong></li><li><strong>"We need to appeal to the Gen Z-ers and the younger generation as well," Danoff said.</strong></li><li><strong>Danoff also lamented selling a large portion of the fund's <keyword id="107096" type="COMPANY" weightage="60" keywordseo="Tesla">Tesla</keyword> stake.</strong></li><li><strong><a href="https://www.businessinsider.com/international?r=US&amp;IR=T?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingest?utm_source=markets&amp;utm_medium=ingesttm_medium=ingest" target="_blank" rel="noopener">Visit Business Insider's homepage for more stories</a>.</strong></li></ul><p>Will Danoff has managed the <a href="https://markets.businessinsider.com/funds/fidelity-contrafund-fund-us3160711095">Fidelity Contrafund</a> for over 30 years, but he hasn't seen anything like the "demographic issue" facing mutual funds right now, he <a href="https://www.youtube.com/watch?v=yp9mEwBaO54">told Bloomberg in a recent interview</a>.</p><p>He was referring to the <a href="https://www.businessinsider.com/gen-z-millennial-day-retail-trader-interviews-wall-street-options-2020-7" target="_blank" rel="noopener">rise of day-trading activity from young market participants</a>, which has thrown many traditional money managers for a loop.</p><p>"We need to appeal to the Gen Z-ers and the younger generation as well, and luckily I think our app is quite good," Danoff said. "But you know, a typical Gen Z-er may not be as interested in owning a <keyword id="6354820" type="DEFINITION" weightage="60" keywordseo="mutual-fund">mutual fund</keyword>."</p><p>Danoff's mutual fund has beaten the <a href="https://markets.businessinsider.com/index/s&amp;p_500_500" target="_blank" rel="noopener">S&amp;P 500</a> benchmark by an average of more than three percentage points annually for the last 30 years, according to Bloomberg. But he said outperforming the market is "much more competitive now," given the thousands of investment options available.</p><p><em><strong>Read more:</strong> <a href="https://www.businessinsider.com/options-trading-strategy-market-wizards-schwager-tony-saliba-shares-advice-2020-9" target="_blank" rel="noopener">Legendary options trader Tony Saliba famously put together 70 straight months of profits greater than $100,000. Here's an inside look at the strategy that propelled him to millionaire status before age 25.</a></em></p><p>"When I started in 1990 there were 260 equity funds, now there are thousands," he said. "There are thousands of hedge funds. There are millions of robinhood investors." </p><p>In terms of what the <keyword id="6405604" type="ORGANIZATION" weightage="60" keywordseo="fidelity">Fidelity</keyword> Contrafund is looking to invest in now, Danoff said it's looking more closely at companies that have a strong environmental, social, and governance (ESG) component.</p><p>"Companies that I'm invested in care deeply about our country," he said. "They care deeply about the environment and they realize making all stakeholders happy is good for business." </p><p><em><strong>Read more:</strong> <a href="https://www.businessinsider.com/stock-market-crash-risks-60-40-portfolio-record-low-leuthold-2020-9" target="_blank" rel="noopener">A 'disturbing new all-time low' in the market just flew under the radar as stocks hit record highs — and one Wall Street expert warns it implies years of bleak returns for young investors</a></em></p><p>Danoff also said the fund is heavily invested in work-from-home beneficiaries, while he has not made a large bet on industries that have been hit hardest by the pandemic like airlines and hotels.  </p><p>With regards to Tesla, he said that the Contrafund sold a large portion of its stake in 2017 and 2018 amid short-term profitability concerns. Danoff now laments the divestiture.</p><p>"Elon Musk is a remarkable executive, he's a super smart man, and I should not have cut back," he said, predicting that in 10 years from now all new cars may be electric vehicles or hybrids.</p><p>He concluded: "At some point hopefully I'll be able to buy back the stock. I own a very small position now but I wish I owned more."</p><p><em><strong>Read more:</strong> <a href="https://www.businessinsider.com/stock-picks-to-buy-best-ideas-across-market-sectors-jefferies-2020-9" target="_blank" rel="noopener">Jefferies handpicks the 17 best stocks spanning multiple sectors to buy now — and details why each company's future looks 'particularly attractive,' even in a downturn</a></em></p>

'We need to appeal to the Gen Z-ers': A Fidelity fund manager overseeing $230 billion explains how his firm is responding to the Robinhood revolution — and laments selling out of Tesla

<ul class="summary-list"><li>ETFs (exchange-traded funds) and <keyword id="6357979" type="UNKNOWN" weightage="60" keywordseo="mutual-funds">mutual funds</keyword> offer cost-efficient ways to diversify, but they differ in how they’re taxed, traded, and managed.</li><li>ETFs are typically passively managed and trade like stocks, with lower fees and minimums than mutual funds.</li><li>Mutual funds are professionally managed investment portfolios that trade once a day and are preferred by 401(k) plans.</li></ul><p>ETFs, or exchange-traded funds, and mutual funds have a lot in common. </p><p>Both investment products pool investors' money into a collection of assets — typically stocks, but can be other assets like bonds, real estate, and commodities. Geared towards individuals, both offer a low-cost, diversified way to invest. </p><p>But ETFs and mutual funds also hold important differences, especially in the way they're traded and managed, and what they charge and how they're taxed. </p><h2>What is a mutual fund?</h2><p>A <a href="https://markets.businessinsider.com/funds" target="_blank" rel="noopener">mutual fund</a> is a group of assets like stocks or bonds that you can purchase by pooling money with other investors. They are run by a professional portfolio manager who selects the fund based on a published investing strategy, so all the investors (and regulatory bodies like the SEC) know what they're getting when they invest. </p><p>As of 2019, there are nearly <a href="https://www.statista.com/topics/1441/mutual-funds/#:~:text=In%20the%20United%20States%2C%20there,the%20United%20States%20in%202018." target="_blank" rel="noopener">8,000 US-based mutual funds</a> with total assets worth a staggering $21.3 trillion, according to Statista.</p><p>Mutual funds offer plenty of benefits, from their affordability to the fact that professionals do the research for you. They also help diversify risk: You buy a fund with many different assets to avoid getting burned if any individual asset loses its value. Mutual funds are intended to be long-term, buy-and-hold investments.</p><h2>What is an <keyword id="6357062" type="DEFINITION" weightage="60" keywordseo="ETF">ETF</keyword>?</h2><p>Like a mutual fund, <a href="https://www.businessinsider.com/personal-finance/what-is-an-etf-exchange-traded-fund" target="_blank" rel="noopener">an ETF is an investment vehicle</a> that combines money from many investors into a pool to invest in stocks, bonds, and other assets. </p><p>Developed in the mid-'90s, ETFs are younger than mutual funds, but their number has exploded over the last 10 years. As of 2019, there are <a href="https://www.statista.com/statistics/350525/number-etfs-usa/" target="_blank" rel="noopener">over 2,000 ETFs</a> based in the US, with approximately $3.4 trillion in assets. </p><p>Unlike mutual funds, however, ETFs trade daily on stock exchanges — which means that they can be turned over early and often, though they are also suited to a long-term investment strategy.</p><p>If the aim of mutual funds is to beat the market, the aim of ETFs is often to follow the market. The majority of ETFs are index funds, meaning their portfolios mirror the holdings of a particular segment of the stock, bond, or commodity markets, be it a general one like the S&amp;P 500, or a highly specific one, like biotech. </p><h2>The main differences between ETFs and mutual funds</h2><p>The diversification that ETFs offer makes them very similar to mutual funds. But when figuring out which is right for you, there are a few key differences worth knowing.</p><h3>1. ETFs and mutual funds are sold differently</h3><p>If you have a brokerage account, either at a traditional full-priced broker, a discount broker, or an online trading app, you can buy and sell ETFs. You may have to pay broker fees per transaction, which can add up if you're buying small quantities often. </p><p>In contrast, you buy a mutual fund either through a brokerage or through the investment company that owns and manages it. Time was when these investment companies wouldn't offer funds from other firms, only their own (does a Nike store sell Reeboks?). But over the last 10 years, as they've evolved into "financial services providers," some of the larger players — think <keyword id="174755" type="COMPANY" weightage="60" keywordseo="Vanguard">Vanguard</keyword> or Fidelity — have started offering other fund families, too.</p><h3>2. ETFs and mutual funds are priced differently</h3><p>Mutual funds set their prices only once a day after the markets have closed. The price of a mutual fund share is technically known as the net asset value (NAV) since it represents the combined worth of the entire portfolio, not just a particular holding. </p><p><a href="https://markets.businessinsider.com/etfs" target="_blank" rel="noopener">ETF share prices </a>are like any stock share price: continually changing throughout the day, based on buying and selling in the market. So they can be more volatile than mutual funds.</p><h3>3. Mutual funds are actively managed, while ETFs are typically passively managed</h3><p>For the last couple of decades, mutual funds have offered active money management: financial pros — fund managers, backed by analysts — who pick and choose investments, trying to deliver market-beating returns. And ETFs have been the vehicle of choice for passive, auto-pilot investing — following an index or other group of assets, on the grounds that nothing outperforms the market overall. </p><p>Recently that dichotomy has changed somewhat: You can find many actively managed ETFs, and if you want passively managed mutual funds, you can find those too.</p><p>However, ETFs remain the darlings of robo-advisers and automated trading platforms. If you have an online investment account, like one from Betterment, Merrill Edge, or Vanguard Digital Advisor, odds are it's investing your money in index ETFs.</p><h3>4. ETFs are cheaper than mutual funds</h3><p>Mutual funds are generally more expensive than ETFs. They require more human power to operate, which means they charge larger fees to pay their managers and commissions to pay salespeople. </p><p>While they're spending less money on marketing than they have in the past, many funds still charge sales commissions called "loads." Other fees include redemption fees, exchange fees, account fees, and management fees. </p><p>For example, in regards to equity mutual funds, the average <keyword id="162921" type="PERSON" weightage="60" keywordseo="expense-ratio">expense ratio</keyword> — as these fees are collectively called — is 1.24%, <a href="https://www.ici.org/pdf/per26-05.pdf" target="_blank" rel="noopener">according to the Investment Company Institute</a> (ICI). All these fees add up and cut into the total return of the fund.</p><p>With ETFs the only commission you pay is to your broker, and since 2018 many brokers have waived transaction fees and commissions.</p><p>Because they're so often passively managed, ETFs generally have lower expense ratios, as low as 0.03% The average is 0.49%, <a href="https://www.ici.org/pdf/per26-01.pdf" target="_blank" rel="noopener">according to the ICI</a>.</p><h3>5. Mutual funds have higher minimums</h3><p>Mutual funds generally demand a minimum investment, ranging from a few hundred dollars to four — or even five figures. </p><p>With ETFs, there is no minimum investment, and the price is whatever a single share costs on the exchange at that time.</p><h3>6. ETFs have tax advantages </h3><p>ETFs are a little more tax-friendly than mutual funds, which also brings down the total cost of owning them. When a mutual fund manager sells an asset for a profit, the holders of the fund are liable for a portion of the capital gain on that sale, even if they still own the fund itself. </p><p>Because the buying and selling that regulates the price of the ETF is done by outside parties ("authorized participants" in investment lingo) and not the fund itself, holders of ETF shares are not liable for capital gains unless they personally sell their shares at a profit.</p><h3>7. Retirement plans prefer mutual funds </h3><p>When you have an employer-sponsored 401(k) or a 403(b) plan account, you're restricted to the funds offered by the plan manager. Those offerings overwhelmingly remain mutual funds. </p><p>Although they technically can offer ETFs, many plans shy away from them due to compliance issues: Actively traded ETFs can come perilously close to being considered speculative investments, which are frowned on for retirement accounts. This is particularly true of 403(b) plans, which have more strict rules about what kinds of investments they can make.</p><h3>8. You can unload ETFs faster</h3><p>Mutual funds being priced only once a day, at the end of the day, makes it hard to get your money out quickly — because you see the price of its underlying assets falling, for example. </p><p>In contrast, you can sell an ETF any time during the trading day, like any stock. Of course, because they're so easy to buy and sell, you could be more likely to make a bad, emotionally driven move. </p><h2>The financial takeaway</h2><p>While they're both geared to individual investors, ETFs have become popular since the turn of the 21<sup>st</sup> century as a low-cost alternative to mutual funds. ETFs charge lower fees and have no minimum investment (other than the price of a single share).</p><p>Still, outnumbering ETFs as they do, mutual funds offer more variety, and a chance to outperform the market. </p><p>For investors who are saving for retirement, especially in an employee-sponsored 401(k) plan, mutual funds may be the best investment. For DIY investors, especially those who prefer to operate via an app or online, ETFs may offer the edge.</p><h2>Related Coverage in <a href="https://www.businessinsider.com/investing-reference" target="_blank" rel="noopener">Investing</a>:</h2><h3><a href="https://www.businessinsider.com/personal-finance/how-to-invest-in-mutual-funds-step-by-step-guide" target="_blank" rel="noopener">How to invest in mutual funds and grow your money for retirement, a bucket-list trip, or any other long-term goal</a></h3><h3><a href="https://www.businessinsider.com/personal-finance/what-is-an-etf-exchange-traded-fund" target="_blank" rel="noopener">An ETF is a type of investment that's easy to purchase and requires little management</a></h3><h3><a href="https://www.businessinsider.com/personal-finance/how-to-invest-in-index-funds-explained" target="_blank" rel="noopener">How to invest in index funds to build long-term wealth</a></h3><h3><a href="https://www.businessinsider.com/personal-finance/warren-buffett-recommends-index-funds-for-most-investors" target="_blank" rel="noopener">Warren Buffett thinks index funds are the best way for everyday investors to grow their money</a></h3><h3><a href="https://www.businessinsider.com/personal-finance/how-to-invest-in-a-401k-for-retirement" target="_blank" rel="noopener">Experts say your office 401(k) is the best place to start investing. Here's how it works.</a></h3>

You Searched For "mutual fund investments" and got 6 results

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