When it comes to ETFs vs. Mutual Funds, that’s a tag of war that’s hard to determine a winner. After all, they are investment options for UAE residents and are equally popular. Such similarities make it hard for individuals to choose between them. Fortunately, some differences can break this tie. Read on to understand the better investment for you between ETFs and mutual funds as a UAE resident.
Table of Contents
Mutual Funds Investment in UAE
Mutual funds are a pool of money from various investors that the fund invests in different instructions on behalf of the individuals. Every investor has a fraction of that money pool. These funds are then invested in different instruments on behalf of the contributors. Investment instruments are often stocks, bonds, or a combination of both. Besides being diversified asset portfolios, mutual funds have professional portfolio managers, which is another advantage of choosing them.
ETFs Investment in UAE
On the other hand, ETFs stand for Exchange Traded Funds. Similarly, ETFs are investment funds traded in stock exchanges like individual stocks. However, ETF units are diversified portfolios comprising real estate, commodities, bonds, and stocks. An investor will buy one or more shares of this portfolio at a market price that fluctuates throughout the day.
Major Differences between ETFs and Mutual Funds
The differences between ETFs and mutual funds can help you identify the best investment option. So, without much ado, let’s look at ETFs vs. Mutual Funds.
Cost
ETFs have explicit and implicit costs, which often go unnoticed despite being substantial. The explicit costs include what its provider charges as the operating expense ratio. Another one is the trading commissions that the broker charges. Then, there is the premium or discount and the bid or ask spread. Consequently, the price you buy or sell an ETF isn’t usually the actual cost. The same applies to mutual funds, but they don’t demand trading commissions. However, it has additional costs, such as early redemption fees and sales loads. Between ETFs and mutual funds, the former has more costs than the latter.
Holdings Transparency
ETFs are relatively transparent since they disclose their holdings after each trading session. On the other hand, mutual funds disclose their crucial details, including fees and holdings, quarterly via reports.
Minimum Investments
You can invest as little as the value of one share when dealing with ETFs. On the other hand, the minimum investment of mutual funds is a set amount that doesn’t relate to the fund’s share price. Usually, it is a flat dollar amount.
Management
ETFs have passive management, whereas mutual funds can have passive or active management. Things that determine the management approach of mutual funds include the structure and the type. Examples of mutual funds using passive management are funds of funds and index funds.
Liquidity
You can buy or sell ETF units at any time of the day as long as they are within the session’s hours. On the other hand, you can only buy mutual funds once a day at a price the fund administrator determines, popularly known as the net asset value.
Trading Differences between ETFs and Mutual Funds
You can actively buy and trade an ETF unit like individual stocks. On the other hand, you will buy a mutual fund unit from the fund house directly or via authorized intermediaries.
Which is the Better Investment Choice for UAE Residents?
Certain factors determine the better investment choice for UAE residents who are torn between ETFs and mutual funds. They include;
Trading Rules
Mutual funds are ideal for an investor who doesn’t plan to make regular purchases. It explains why they fall under passive investments. In contrast, you can trade ETFs on the market the same way you trade regular stocks. No wonder they suit people who buy and sell units regularly.
Investment Timeline and Frame
EFTs, especially market indices, are ideal for long-term investments. On the other hand, an investor seeking quick returns within a short period should consider mutual funds.
Financial Goals
ETF index funds may not be ideal for an individual with ambitious financial goals. After all, the returns are relatively low. Nonetheless, ETFs give you stable returns, and the risk isn’t high. On the other hand, mutual funds have proven effective for substantial growth, but that comes with bigger risks, too.
Risk Tolerance
Mutual funds are the go-to investments for people interested in high rewards that come at a high risk. As a UAE resident who likes such an investment style, consider it. As for those wishing to minimize risk as much as possible, ETFs will do.
Final Words
There is no distinct answer regarding which investment is better for UAE residents: ETFs and mutual funds. What works for one resident may not be ideal for another. For instance, one’s financial goals can dictate the route to take since one is ideal for short-term investment, whereas another is suitable for long-term investment. Consider the tentative time duration and the risk level. Consider other factors such as time duration, returns, and risk appetite. Whichever meets your investment needs is the best choice.
1 thought on “ETFs vs. Mutual Funds: Which is the Better Investment Choice for UAE Residents?”