Both “mutual funds” and “ETFs” are terms that frequently appear in introductory investment books, but many people are likely confused about what the actual difference is. Since they are similar in that they are both “products that allow you to invest in a diversified portfolio of multiple companies,” it is an especially difficult point for beginners to distinguish.
In this article, we will organize the differences between mutual funds and ETFs and answer the question, “So, which one should a beginner start with?”
※This article introduces the general characteristics of financial products such as mutual funds and ETFs and does not recommend any specific products or stocks. Since systems such as fees and tax regulations are subject to change, please be sure to check the latest official information from each management company or securities company when actually making a purchase.
What is a mutual fund?
A mutual fund is a product where money collected from many investors is pooled together as a single large fund, and investment professionals (fund managers) invest it in a diversified manner across stocks, bonds, and other assets.
Its greatest feature is that it allows you to achieve “diversified investment across many stocks,” which would cost hundreds of thousands or millions of yen on your own, starting from a small amount. The net asset value (the price of the mutual fund) is calculated only once a day, and all transactions for that day are executed at the same price.
What is an ETF?
An ETF (Exchange Traded Fund) is also a type of mutual fund in terms of its structure. While they share the point of being able to invest in a diversified portfolio of many stocks, the major difference is that they are “listed on a stock exchange and can be traded in real-time just like stocks.”
Just like stock prices, the price fluctuates constantly while the market is open, and you can place buy and sell orders at any time you like.
Commonalities: Both make “diversified investment” easy to achieve
Both mutual funds and ETFs have the same fundamental purpose.
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You can invest in multiple companies or assets just by buying one product
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Easy to start even without the knowledge or time to select individual stocks
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Many products are linked to indices such as the Nikkei Stock Average or the S&P 500, making price movements relatively easy to understand
For beginners who “don’t yet have the confidence to pick individual stocks but want to invest in something,” both can be reliable options.
Comparing the definitive differences
Item Mutual Fund ETF Timing of trade Once a day, executed at net asset value Can be traded in real-time during trading hours Place of purchase Securities companies, banks, etc. Stock exchange (via securities companies) Minimum purchase amount Many products start from around 100 yen Per unit (several thousand to tens of thousands of yen depending on the stock) Ease of accumulation Many products are easy to set up for accumulation Need to choose a securities company or product that supports accumulation Trust fee (cost while holding) Large differences depending on the product Generally tend to be low-cost products Trading fees Many products are free (no-load) May incur trading fees similar to stocks
※The above are general trends, and conditions vary depending on the product. Please be sure to check the details in the prospectus or on the official website before purchasing.
Pros and cons of each
Advantages of mutual funds
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Easy to start with a small amount, from around 100 to 1,000 yen
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Easy to set up automatic monthly investments of a fixed amount
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Since the price only changes once a day, there is no need to check price movements frequently
Disadvantages of mutual funds
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Cannot be traded in real-time, making it difficult to respond immediately to sudden price changes
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Depending on the product, trust fees (costs incurred while holding) may be set relatively high
Advantages of ETFs
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Can be traded in real-time just like stocks
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Generally, there is a tendency for many products to have lower trust fees
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For those accustomed to stock investing, the operation feels familiar
Disadvantages of ETFs
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Depending on the brokerage firm, automatic investment settings may not be supported or may be limited to certain products
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Trading commissions may be charged each time you purchase
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Since they are purchased in units of shares, some products are harder to adjust in small amounts compared to mutual funds
Which is recommended for beginners?
To conclude, for beginners who want to “continue investing while steadily accumulating monthly without worrying too much about price movements,” mutual funds tend to be easier to start with. The reasons are as follows.
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You can start with a small amount, such as 100 yen, so the damage is small if you fail
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Once you set up the investment plan, it can continue automatically
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Since the price only changes once a day, it is harder to get caught up in the emotional ups and downs of price movements
On the other hand, for those who have experience with stock investment, want to get used to real-time trading, or want to keep costs as low as possible, ETFs are also a viable option.
You do not need to limit yourself to just one; a common approach is to start by getting used to investing through mutual fund accumulation, and then try ETFs once you have more leeway.
Simple steps to get started
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Open a brokerage account (consider opening a NISA account at the same time)
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For mutual funds, set up an ‘accumulation plan’; for ETFs, decide on the ‘ticker and number of shares’ to purchase
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Always check the cost aspects, such as trust fees and commissions, in advance
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Do not invest a large amount at once; try starting with a small amount
For any product, we recommend that you first try purchasing a small amount to get used to price movements and how to use the management screen.
Summary
Mutual funds and ETFs share the common feature of allowing for ‘easy diversified investment,’ but they differ in terms of trading timing, cost structure, and ease of accumulation.
There is no ‘absolute right answer’ for which one to choose; it is important to select based on your own investment style and goals. First, understand the differences in how they work, and then try them out with a small amount.
(This article introduces the general characteristics of financial products such as mutual funds and ETFs and does not recommend the purchase or sale of any specific product. Please invest at your own risk.)