Diversification is one way to reduce investment risk. Diversification can be achieved by purchasing multiple stocks or bonds. Or just buy mutual funds and ETFs.
Mutual funds and ETFs are two types. joint investment contract twins but different The similarity is that buying 1 unit of these two investment tools means that you all buy other investment instruments, whether it be stocks, bonds, etc. So what’s the difference? Check out the discussion below:
What is ETF .
Exchange-traded funds (ETFs) It is a combined investment contract similar to a mutual fund. But it can be traded in real time on exchanges. This investment tool was first published by State Street Global Advisors in 1993.
The first ETF was available in Indonesia in 2007 with the issuance of Premier ETF LQ-45 (R-LQ45X) by PT Indo Premier Investment Management. As of the third quarter of 2022, only 50 ETF products are in circulation in Indonesia. These products are generally available for purchase on stock trading apps.
Differences Between ETFs and Ordinary Mutual Funds
Although similar to mutual funds, ETFs have some differences with these instruments. Here are some of them:
1. Trading Mechanism
exchange-traded funds (ETF) and mutual funds issued by investment manager. The difference is To sell or buy mutual funds You must first enter the information into the investment manager. to be able to process
ETFs, on the other hand, are traded directly on exchanges. in other words Your data will be entered directly into the Indonesian stock exchange system without any intermediary investment managers. And the price will fluctuate throughout the trading hours.
Mutual Fund Price (NAV per unit) will occur only when the Indonesian capital market is closed. While ETF pricing happens in real time, same as stock This difference in pricing methods makes ETFs relatively liquid compared to conventional mutual funds.
3. Minimum purchase
Buy a minimum 1 unit of mutual fund as the author said. This is because in investing in this instrument Your funds will be mixed with other investors’ funds to purchase the desired investment tools. This made it possible to purchase this tool for only Rp 10,000.
Meanwhile, the minimum purchase of ETFs is 100 units (secondary market) and 100,000 units in primary market. (when a new investment manager issues an ETF), so the capital required to purchase this instrument is also quite large.
4. Transaction fees
The amount of mutual fund transaction fees is determined by each investment manager. The amount of the ETF transaction fee is 1% to 3% of the transaction value.
5. Risk Management
Since they are not sold through investment managers, ETF investors inevitably have to manage their risks. Because you can see the market price directly. So you can immediately decide whether to buy or sell this instrument. or just hold it until the profit goal is achieved.
6. Settlement Process
In addition to the impact on the risks The absence of investment managers between investors and the stock exchange also affects the liquidation process. (Debiting) as well in the process of buying and selling mutual funds. It takes investors 2-7 business days (depending on the type) to complete this clearing process. Unlike ETFs, withdrawals and purchases of ETFs take only 2 days.
7. Reference property
According to the official announcement on the page idx.co.idOne difference between ordinary mutual funds and ETFs is the underlying asset (underlying asset). In the case of the first investment instrument underlying asset The basis for investment managers is individual stocks, while ETFs underlying asset is the index
From here you might ask, what is the difference between ETFs and index mutual funds? So far, the only ETF product available in Indonesia is a stock index-based ETF. but in other countries underlying asset ETFs can range from bonds to exchange rates.
8. Naming mechanism
The difference between ETFs and mutual funds is the naming mechanism. In this case, ETFs are named in abbreviated form with four letters, such as stocks, while mutual funds do not. For example, the XISC code for an ETF is named Premier ETF Indonesia. State-Owned Companies Issued by PT Indo Premier Investment Management
Better ETFs or Common Mutual Funds?
from the above discussion In conclusion, in choosing between an ETF or an ordinary mutual fund You should consider the following points:
- capital. As mentioned above The funds required to purchase an ETF are relatively higher than most mutual funds.
- analytical abilityAs they are independently managed, ETF investors also need to manage their investment risks. to minimize this investment risk. Investors must give time and skills to analyze the product market.
- liquidityThe ETF liquidation process is relatively faster than mutual funds. which means If you are looking for a consolidated investment tool that can settle quickly, ETFs are the right choice.
- transaction feeYou can also consider the differences in the transaction fee mechanism between the two tools above to choose the one that is more suitable for you. Mutual funds or ETFs
Despite the above differences But mutual funds and ETFs are two types of investment tools that are legal and have their own advantages and risks. Please select according to your taste and needs.
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