What is Mutual Fund & Exchange Traded Fund

 

Mutual fund

      

              A mutual fund is a financial vehicle that collects assets from shareholders to invest in assets like Bonds, Real estate, Stocks, and other money market instruments. These funds are managed by professionally qualified money managers. They allocate their funds to different asset types and try to build well-balanced portfolios for their clients. Fund managers looking to make money from capital gains and other income for investors of the fund. 

Mutual funds give individual & small investors the to diversify their portfolios and access to management by professionals.  Those fund managers provide investment advisory services and try to maximize the return of the fund. Each investor, therefore, participates proportionally in gains or losses in the fund. Funds performance is tracked separately and shareholders can use that data to analyze and track. 

Most of the time mutual funds are managed by large investment funds such as Blackrock, Fidelity Investment, Bridgewater Associates, and Vanguard.

Mutual funds are divided into several types according to their investment objective, the type of return they seek, and the asset classes in which they invest in. Mutual funds charge annual fees, commissions, or management fees in return for their services.

The value of the mutual funds is determined by the performance of the fund. Mutual funds usually issue their shares as units of the funds. Ex: 500 MN dollars worth of fund issue 5 million units to shareholders at a price of 100 $ a unit. 

There are several types of mutual funds that you can invest in according to your risk tolerance and interest. A few of them are Index funds, Stock funds, Money market funds, Balanced funds, Bond funds, Global funds, and specialty funds.

Exchange Traded Funds (ETF) 

                ETFs allow investors to park their money in a fund that invests in various assets like a mutual fund. It’s a basket of securities that are traded on the exchange just like stocks. ETFs can be purchased or sold through a stock exchange as regular stock. ETFs can contain all types of investments such as stocks, bonds, commodities, and other types of international investment assets. It’s a type of pooled investment security that runs like a mutual fund. 

However, ETF shares are traded on the stock exchange at a market price that may or may not be equal to their net asset value. 

Exchange Traded Funds usually charge fewer chargers and commotions than purchase the stock individually.  Because of that ETFs are a more cost-effective option. And also more liquid when compared to mutual funds.

There are various types of ETFs available for investors, Passive and active ETFs, Currency ETFs, and Leverage ETFs are examples of that.

Before you invest in a mutual fund or ETF you should read their prospectus. It includes detailed information and investment objective. Management fees, other charges and costs, Risks, Historical data, and performance. Most of the time funds publish their prospectus in their website. Or you can ask your broker. 

There’s a quote by Warren Buffet “ Do not invest in something that you can’t understand” 

Finally, if You may wish to invest in the above investment vehicles it’s better to find an investment professional. They will help you to understand prospectus and complex investment products in markets.