Sharekhan Blog

Can Mutual Funds be Traded like Stocks?

  • Jan 31, 2024

Investing in mutual funds offers a diverse and accessible avenue for individuals seeking to grow their wealth.Even though the procedure seems simple, it differs from the well-known world of trading stocks and exchange-traded funds (ETFs). Mutual funds boast a unique structure that introduces the details that may not be immediately apparent to first-time investors. 

In this blog post, we'll get into the intricacies of trading mutual funds, exploring key aspects such as buying and selling procedures, research considerations, fees, trade settlement dates, and the critical question – can mutual funds be traded like stocks?

Understanding Mutual Fund Transactions

1. Buying Mutual Fund Shares

Unlike stocks and ETFs traded freely on the open market, mutual funds are typically purchased directly from the financial company managing the fund or through online discounts and full-service brokers.

Many mutual funds set minimum contribution requirements ranging from Rs.100 to Rs.500. However, some may have higher thresholds, and certain funds may even be closed to new investors due to overwhelming popularity.

2. Researching Your Investment

Getting around the vast mutual funds trading sector requires careful research to identify the most suitable investment opportunities. There are many ways to research your investment:

Investors can find comprehensive information on fund goals, strategies, historical returns, stock holdings, and portfolio composition on the managing company's website. 

Financial news websites and online brokers also provide valuable insights from analysts and commentators. 

It's crucial to consider the fund's historical tracking error, especially for indexed funds aiming to outperform benchmarks.

3. When to Buy and Sell

Mutual fund shares are transacted at the end of the trading day, unlike stocks, whose prices fluctuate throughout the day. The net asset value (NAV), representing the total assets in the fund's portfolio, is calculated after the market closes. Investors place orders to buy shares, executing after the NAV is posted. Mutual funds often allow the purchase of fractional shares, enhancing flexibility for investors.

4. Understanding Fees

Fees are a significant aspect of mutual fund investment. Annual expense ratios, load fees, purchase fees, redemption fees, and 12b-1 fees contribute to the overall cost. Load fees can be upfront or back-end, impacting investors differently based on their investment horizon.

Different classes of mutual fund share prices (A, B, or C) offer varying fee structures, emphasizing the importance of fee awareness in maximizing returns.

5. Trade, Settlement, Ex-Dividend and Report Dates

Mutual fund transactions follow a two-day settlement period fixed by the SEBI.

1. The trade date marks when an order is placed, but the transaction is only finalized after two business days. 

2. This settlement period ensures a smooth and regulated process for investors, allowing funds to adjust their portfolios accordingly.

3. Investors eyeing dividends from mutual funds should be aware of ex-dividend and report dates. 

4. The ex-dividend date, occurring three days before the report date, determines eligibility for upcoming dividends. 

Investors seeking to minimize tax implications can strategically time their purchases around these dates.

6. Selling Mutual Fund Shares

When selling mutual fund shares, the process mirrors the buying procedure. Investors engage in direct transactions with the fund company or an authorized broker. The redemption amount is determined by multiplying the number of shares with the current Net Asset Value (NAV) and subtracting any applicable fees. 

It's important to note that early redemption might attract additional charges, underscoring the long-term nature of mutual fund investments. This practice encourages investors to adopt a patient approach, aligning with the inherent characteristics of mutual funds designed for sustained wealth growth over an extended period.

7. Early Redemption Rules

Mutual funds discourage frequent trading to protect the interests of long-term investors. Constant trading can trigger capital gains distributions, increasing taxable incomes for shareholders. 

To deter excessive trading, funds may impose early redemption fees or restrict shareholders engaging in short-term trading from making further transactions for a specified period.

Can Mutual Funds be Trade like Stocks?

So, to answer this, we can say that contrary to stocks, mutual funds cannot be directly traded on the stock market. However, the units of mutual funds can be traded in the form of exchange-traded funds (ETFs). ETFs are distinct from the mutual fund units bought or sold directly from an Asset Management Company (AMC) or through a distributor. 

ETFs, traded on the stock market, offer investors the flexibility to purchase and sell throughout the trading day, much like stocks. It's essential for investors interested in this dynamic approach to have trading or demat accounts.

The Bottom Line

While mutual funds differ from stocks' trading dynamics, understanding their unique features is crucial for investors aiming to optimize their investment portfolios. Understanding mutual fund trading involves careful consideration of fees, diligent research, and an awareness of settlement dates and early redemption rules. While mutual funds cannot be traded directly on the stock market, the emergence of ETFs provides an avenue for investors seeking a more dynamic and stock-like trading experience within mutual fund investments.

Team Sharekhan
by Team Sharekhan

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