Should I change my mutual funds to ETFs?
If you're paying fees for a fund with a high expense ratio or paying too much in taxes each year because of undesired capital gains distributions, switching to ETFs is likely the right choice. If your current investment is in an indexed mutual fund, you can usually find an ETF that accomplishes the same thing.
If you're paying fees for a fund with a high expense ratio or paying too much in taxes each year because of undesired capital gains distributions, switching to ETFs is likely the right choice. If your current investment is in an indexed mutual fund, you can usually find an ETF that accomplishes the same thing.
ETFs can be more tax-efficient than actively managed funds due to their lower turnover and fewer transactions that produce capital gains. ETFs are bought and sold on an exchange throughout the day while mutual funds can be bought or sold only once a day at the latest closing price.
Unlike ETFs, mutual funds can offer more specific strategies as well as blends of strategies. Mutual funds offer the same type of indexed investing options as ETFs but also an array of actively and passively managed options that can be fine-tuned to cater to an investor's needs.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the fund's performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.
- Trading fees.
- Operating expenses.
- Low trading volume.
- Tracking errors.
- The possibility of less diversification.
- Hidden risks.
- Lack of liquidity.
- Capital gains distributions.
As we covered earlier, infrequently traded ETFs could have wide bid/ask spreads, meaning the cost of trading shares of the ETF could be high. Mutual funds, by contrast, always trade without any bid-ask spreads.
There are many ways an ETF can stray from its intended index. That tracking error can be a cost to investors. Indexes do not hold cash but ETFs do, so a certain amount of tracking error in an ETF is expected. Fund managers generally hold some cash in a fund to pay administrative expenses and management fees.
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
How many mutual funds should I have?
While there is no precise answer for the number of funds one should hold in a portfolio, 8 funds (+/-2) across asset classes may be considered optimal depending on the financial objectives and goals of the investor. Further, higher allocation of portfolio to the right fund is of crucial importance.
The administrative costs of managing ETFs are commonly lower than those for mutual funds. ETFs keep their administrative and operational expenses down through market-based trading. Because ETFs are bought and sold on the open market, the sale of shares from one investor to another does not affect the fund.
For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.
"A newer investor with a modest portfolio may like the ease at which to acquire ETFs (trades like an equity) and the low-cost aspect of the investment. ETFs can provide an easy way to be diversified and as such, the investor may want to have 75% or more of the portfolio in ETFs."
Hold ETFs throughout your working life. Hold ETFs as long as you can, give compound interest time to work for you. Sell ETFs to fund your retirement. Don't sell ETFs during a market crash.
Diversification: A well-diversified portfolio should include ETFs that cover different asset classes (stocks, bonds, commodities, etc.), sectors, industries, and geographical regions. This spreads risk and reduces the impact of any single investment on the overall performance.
What is the 8-4-3 rule of compounding? In the 8-4-3 strategy, the average return of a particular investment amount for 8 years is 12 per cent/annum, while after that time period, it will take only half of that horizon, i.e., 4 years (total 12 years), to get a return of 12 per cent.
It is generally recommended to exit a poorly performing mutual fund if it has consistently underperformed its benchmark over a sustained period of time, typically 1-2 years. Investors should also consider the reasons for the poor performance and evaluate if those issues are likely to persist in the future.
When to withdraw money from mutual fund? Withdraw money from mutual funds when you need funds for financial goals, emergencies, or if your investment objectives change, but consider potential tax implications and market conditions.
ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
Can an ETF go to zero?
However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely. The sharpest decline the last few decades has been in 2007, when some total stock market ETFs like IWDA lost 37% in one year.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
The single biggest risk in ETFs is market risk.
Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.
The U.S. stock market is considered to offer the highest investment returns over time. Higher returns, however, come with higher risk. Stock prices typically are more volatile than bond prices.
References
- https://timesofindia.indiatimes.com/business/faqs/mutual-fund-faqs/mutual-fund-risks-can-all-money-be-lost-in-a-mutual-fund/articleshow/67638471.cms
- https://scripbox.com/mf/will-mutual-fund-investment-drop-to-zero-ever/
- https://m.moneycontrol.com/investor-education/mfexperts/why-mutual-funds-do-not-guarantee-returnswhy-is-it-good-7493481.html
- https://www.investopedia.com/articles/investing/020116/when-right-time-change-mutual-funds-etfs.asp
- https://groww.in/blog/safe-invest-mutual-funds-india
- https://www.investopedia.com/articles/mutualfund/08/recession-proof-mutual-funds.asp
- https://homework.study.com/explanation/which-of-the-following-would-generally-be-considered-the-riskiest-investment-a-u-s-government-bonds-b-certificates-of-deposit-from-your-local-bank-c-corporate-stocks-d-all-of-the-above-are-considered-high-risk.html
- https://gitnux.org/average-mutual-fund-return/
- https://smartasset.com/investing/where-do-billionaires-keep-their-money
- https://lendedu.com/blog/how-much-interest-would-you-earn-on-a-million-dollars
- https://www.thehindubusinessline.com/opinion/the-rise-and-rise-of-mutual-funds/article67735279.ece
- https://www.gobankingrates.com/investing/funds/do-millionaires-invest-in-mutual-funds/
- https://www.etf.com/etf-education-center/etf-basics/what-risks-are-there-in-etfs
- https://www.usaa.com/inet/wc/advice-finances-safe-place-for-saving-cash
- https://www.canstar.com.au/investor-hub/buy-sell-hold-etfs/
- https://www.investopedia.com/ask/answers/10/mutual-funds-advantages-disadvantages.asp
- https://www.amortization.org/savings/10000/20
- https://www.investopedia.com/ask/answers/021615/what-safest-investment.asp
- https://finance.yahoo.com/news/4-most-popular-banks-millionaires-150054420.html
- https://www.investopedia.com/articles/exchangetradedfunds/09/etf-out-of-business.asp
- https://groww.in/blog/i-have-a-strategy-behind-withdrawing-money-from-mutual-funds-do-you
- https://www.investopedia.com/ask/answers/050115/what-are-some-reallife-examples-8020-rule-pareto-principle-practice.asp
- https://www.investopedia.com/ask/answers/091815/when-are-mutual-funds-considered-bad-investment.asp
- https://www.livemint.com/money/personal-finance/when-is-the-right-time-to-start-investing-11704734414384.html
- https://m.economictimes.com/markets/stocks/news/the-optimal-number-of-mutual-funds-that-you-should-hold-in-your-portfolio/articleshow/99009145.cms
- https://www.debtfreedr.com/10-things-millionaires-do-not-spend-money-on/
- https://scripbox.com/pf/golden-rules-of-wealth-management/
- https://www.bajajfinserv.in/investments/mutual-funds-vs-shares
- https://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp
- https://www.investopedia.com/investing/advantages-of-mutual-funds/
- https://www.kotaksecurities.com/mutual-funds/how-mutual-funds-perform-during-market-crashes/
- https://minimalwellness.com/rule/
- https://curvo.eu/article/build-portfolio-etf
- https://money.usnews.com/investing/articles/how-to-become-a-millionaire-by-investing
- https://www.dspim.com/learn/articles/mutual-fund-intermediate/should-i-put-all-my-money-in-only-mutual-funds-how-can-i-create-a-portfolio-of-mutual-funds
- https://smartasset.com/financial-advisor/where-do-millionaires-keep-their-money
- https://www.sidley.com/en/insights/newsupdates/2023/09/sec-adopts-amendments-to-the-names-rule-under-the-1940-act
- https://time.com/personal-finance/article/mutual-funds-vs-stocks/
- https://www.fool.com/investing/how-to-invest/what-to-invest-in/
- https://www.prudential.com/financial-education/4-percent-rule-retirement
- https://www.zeebiz.com/personal-finance/news-how-8-4-3-compounding-interest-rule-can-accelerate-your-sip-investment-calculator-ppf-mutual-funds-fd-fixed-deposit-tax-saving-schemes-280198
- https://www.diyinvestor.net/money-basics-three-golden-rules-of-money-management/
- https://www.nasdaq.com/articles/do-prices-go-down-in-a-recession-heres-what-usually-gets-cheaper
- https://retirementplans.vanguard.com/VGApp/pe/faces/web/help/ihelp/HelpCenterAnswersAutonomyFeed.xhtml?id=74bdcefc
- https://www.businesstoday.in/mutual-funds/best-mf
- https://money.usnews.com/investing/articles/best-investments-during-a-recession
- https://www.investopedia.com/articles/investing/102915/why-are-etf-fees-lower-mutual-funds.asp
- https://www.bajajfinserv.in/investments/how-to-choose-mutual-funds
- https://www.kotaksecurities.com/mutual-funds/how-mutual-funds-work/
- https://www.statista.com/statistics/255864/top-global-fund-groups-worldwide-by-assets/
- https://www.amazon.com/Rule-Strategy-Successful-Investing-Minutes/dp/0307336840
- https://www.investopedia.com/cds-vs-mutual-funds-5225344
- https://www.bajajfinserv.in/investments/advantages-of-mutual-funds
- https://www.investopedia.com/articles/investing/111315/trading-mutual-funds-living-it-possible.asp
- https://www.fca.org.uk/investsmart/understanding-high-risk-investments
- https://finance.yahoo.com/news/absolutely-nuts-expert-slams-suze-210000688.html
- https://fortune.com/recommends/investing/safe-investments/
- https://www.fca.org.uk/investsmart/golden-rules-investing
- https://stockanalysis.com/article/safe-low-risk-investments/
- https://www.bankbazaar.com/mutual-fund/disadvantages-of-mutual-funds.html
- https://www.ifec.org.hk/web/en/investment/investment-products/funds/specialized-funds/guaranteed-funds.page
- https://www.tataaia.com/blogs/financial-planning/things-to-do-when-losing-money-in-mutual-funds.html
- https://www.bankrate.com/investing/best-investments/
- https://www.experian.com/blogs/ask-experian/where-to-put-savings-in-recession/
- https://www.nerdwallet.com/article/investing/how-to-invest-in-mutual-funds
- https://www.experian.com/blogs/ask-experian/pros-and-cons-of-mutual-funds/
- https://www.investopedia.com/ask/answers/12/safest-place-for-money.asp
- https://m.economictimes.com/markets/expert-view/when-is-the-right-time-to-exit-a-mutual-fund-what-are-the-tax-implications-shilpa-bhaskar-gole-explains/articleshow/104322229.cms
- https://www.investopedia.com/investing/how-pick-best-mutual-fund/
- https://www.usatoday.com/money/blueprint/investing/what-assets-are-recession-proof/
- https://www.quora.com/Who-cannot-invest-in-mutual-fund
- https://www.investopedia.com/articles/investing/021916/etfs-vs-mutual-funds-which-better-young-investors.asp
- https://www.bajajfinserv.in/investments/what-is-monthly-income-plan-mip
- https://www.livemint.com/money/personal-finance/what-is-the-ideal-time-to-exit-from-a-badly-performing-mutual-fund-11681475951160.html
- https://m.economictimes.com/mf/analysis/rs-10000-monthly-sip-in-this-smallcap-mutual-fund-turned-into-rs-19-lakh-in-5-years/articleshow/107712975.cms
- https://www.fidelity.com/learning-center/investment-products/etf/drawbacks-of-etfs
- https://www.investopedia.com/ask/answers/032415/which-investments-have-highest-historical-returns.asp
- https://finance.yahoo.com/news/10-return-investment-roi-141300511.html
- https://groww.in/blog/how-to-invest-in-mutual-funds
- https://www.bankrate.com/investing/best-mutual-funds/
- https://www.schwab.com/learn/story/etf-vs-mutual-fund-it-depends-on-your-strategy
- https://www.livemint.com/mutual-fund/5-best-flexi-cap-mutual-funds-gave-over-20-annualised-returns-in-the-past-5-years-11708584437291.html
- https://www.investopedia.com/ask/answers/101915/should-i-cash-out-mutual-funds-pay-debt.asp
- https://fortune.com/recommends/investing/how-much-of-your-income-should-go-toward-investing/
- https://www.fool.com/the-ascent/buying-stocks/articles/heres-what-happens-when-you-invest-500-a-month/
- https://www.thebalancemoney.com/good-annual-mutual-fund-return-4767418
- https://www.linkedin.com/pulse/what-real-estate-creates-90-millionaires-ben-lovro
- https://www.bajajfinserv.in/investments/how-to-withdraw-money-from-mutual-funds
- https://www.schwab.com/learn/story/are-mutual-funds-good-investment
- https://www.wealthfactor.co/insights/single-post/2018/03/avoid-mfs
- https://finance.yahoo.com/news/tax-tricks-loopholes-only-rich-210001853.html
- https://www.investopedia.com/articles/investing/110314/key-differences-between-etfs-and-mutual-funds.asp
- https://www.ici.org/pdf/bro_mf_fees_faq_p.pdf
- https://curvo.eu/article/etf-risk
- https://www.livemint.com/money/personal-finance/how-much-of-my-salary-should-go-into-sips-11680110041064.html
- https://www.westernsouthern.com/investments/pros-and-cons-of-mutual-funds
- https://www.forbes.com/advisor/in/investing/is-mutual-fund-safe/
- https://www.investopedia.com/investing/when-to-sell-mutual-fund/
- https://www.principal.co.id/en/general-risks-investing-mutual-funds-0
- https://www.bankbazaar.com/mutual-fund/mutual-fund-returns.html
- https://www.fidelity.com/products/trading/Trading_Platforms_Tools/excessive_trading_policies.shtml
- https://www.investopedia.com/ask/answers/05/062305.asp
- https://www.etmoney.com/learn/mutual-funds/what-happens-when-a-mutual-fund-shuts-down/
- https://cleartax.in/s/best-time-mutual-funds
- https://www.foxbusiness.com/personal-finance/etfs-your-portfolio-experts-weigh-in-what-percentage-to-own
- https://www.investopedia.com/why-bond-etfs-go-down-8303231
- https://www.fidelity.com/learning-center/investment-products/etf/risks-with-etfs
- https://www.motilaloswal.com/article-details/are-mutual-funds-safe-know-about-the-risk-associated/5528
- https://www.investopedia.com/articles/investing/111115/5-reasons-choose-mutual-funds-over-etfs.asp
- https://www.investopedia.com/financial-edge/0113/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx
- https://www.bajajfinserv.in/investments/how-much-should-you-invest-in-mutual-funds
- https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-1
- https://www.policybazaar.com/life-insurance/investment-plans/articles/8-smart-ways-to-grow-your-money/
- https://www.indiainfoline.com/knowledge-center/mutual-funds/is-it-right-time-to-invest-in-mutual-funds-know-the-best-time-to-invest-in-mf
- https://cleartax.in/s/mutual-fund-calculator
- https://www.investopedia.com/terms/l/liquidity.asp
- https://www.titan.com/articles/etf-drawbacks
- https://quizlet.com/102349985/quiz-11-wealth-mngmnt-fi077-pd313-pd309-flash-cards/