Read through this post on mutual funds and ETFs or skip to the AllGen Academy mutual funds video below.
Mutual Funds and Exchange Traded Funds
Funds were created to help the average investor own stocks, bonds, and other investments without having to pick individual investments.
Funds are essentially a basket of investments that are mutually funded by a pool of investors. An investor in a mutual fund owns a portion of all the companies or holdings in that fund.
A mutual fund manager chooses the investments and quantities to hold in the fund. Mutual funds can specialize in just one asset class or combine multiple types and classes in a single fund.
By investing in mutual funds, investors can own nearly all asset classes without having to purchase those assets directly. Funds enable average investors to spread risk across many different investments and further diversify their portfolios depending on the composition of the funds they invest in.
Types of Funds
- Mutual Fund – trades once a day at close (4 pm EST); does not trade during the day
- Exchange Traded Fund (ETF) – trades throughout the day during market hours like a stock
There are usually management fees charged by funds to cover operating costs and other expenses. ETFs tend to have less activity with investments being bought and sold within the fund so they often charge lower fees than mutual funds. However, higher fees may not necessarily be a bad thing if the investment outperforms a lower-fee option. We’ll cover active versus passive investments in greater detail later on.
Mutual funds and ETFs are another asset class that can help to make up a well-diversified portfolio and also can help the average investor to diversify and therefore spread risk over many different investments instead of putting all of their investment eggs in one basket. Contact us with any questions on investment management.
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