ETF vs FoF: Key Differences

Mutual funds come in various forms and types. Two particular types of funds that are gaining popularity among retail investors are ETF and FOF. Let’s look at both of these and some of the key differences between the two.

Exchange-Traded Funds or ETFs are mutual funds that invest money into equity, debt, or gold instruments as per the fund's investment objective. Most ETFs follow a particular index or basket of securities, making them very similar to index funds. However, they are also distinctively different from a mutual fund or an index fund.

FoF is a type of mutual fund that invests the fund pool into other mutual funds. These could be from the same AMC or any other as well. There can be many types of such as gold-based, debt-based or equity-based. Some FoFs invest in international mutual fund schemes as well.

There are 4 key differences between the two;

1. NAV vs Market Price Units of FoF, like other mutual funds, are bought or redeemedat its Net Asset Value (NAV) determined at the end of every trading day. An ETF is traded on a stock exchange at the market price of each lot or share of the fund, which can change depending on the market dynamics, just like equity.
2. Cost Since FoFs comprise of underlying funds and are more actively managed by a fund manager, they are slightly expensive. Most ETFs are passively managed funds replicating the performance of an index or basket of securities and come with a low expense ratio.
3. Liquidity Since ETFs are traded on a stock exchange, they offer better liquidity compared to FoF mutual funds, where it might take a few hours to a few days for you to get the money in your account after redemption.
4. Taxation All FoFs are taxed the same as debt funds , even those that invest in equity mutual funds, whereas ETFs are taxed as per their asset allocation. While Debt ETF and Gold ETF are taxed the same as debt funds, Equity ETFs are taxed as equity funds.

• Investment Strategy If you’re looking for more diversification, you can leverage from the widely diversified portfolio of FoFs’ underlying funds. However, if you’re looking to leverage from the growth of an index or a basket of securities, ETFs might be a better choice.
• Style of Investment If your investment style is active, but you don't want to invest in the stock market directly to build your portfolio, ETFs could be the right option . However, passive investors looking to leverage the performance of other mutual funds can opt for FoFs.
• Reliance on the Fund Manager ETFs are passively managed funds, and their performance is largely guided by the index or benchmark it is following. FoF performance relies on the fund manager's performance of not just the FoF but the underlying funds as well.

Between ETF Vs FoF , it is important to choose a fund that aligns with your risk profile and financial objectives. You can choose various types of ETFs or FoFs depending on your investment objective too. And just like any other mutual fund, the longer you stay invested, the better your chances of earning higher compounded returns.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.