Starting out as an investor can be overwhelming to say the least and can sometimes almost feel surreal. A majority of people simply store whatever money they have for retirement in a 401k and they neglect to save in different areas to optimize their dividends and capital gains.
In order to be a successful young investor it’s important to understand the numerous avenues you can take. If you want to invest in individual stocks and take the time to make investing a legitimate hobby of yours, you may not be interested in investing in funds. However, for people who are not making investing in stocks a hobby, investing in diversified funds is an attractive alternative. You’re able to buy the funds without having to constantly monitor them and put in a huge time commitment. But let’s get into the nitty-gritty. What is a mutual fund and exchange traded fund (ETF)?
Let me help to break it down for you.
- A mutual fund is a group of investments, including stocks, bonds, and other securities.
- Mutual funds are managed by a professional advisor at the cost of a management fee.
- The average management fee is between 0.5% and 1.0% of all funds.
- The advisor actively manages the mutual fund in an attempt to beat the market.
- While you can place an order for a mutual fund during the day, the actual trade takes place after the markets close.
Exchange Traded Funds
- An ETF is a fund with a variety of different securities in it such as stocks, bonds, and commodities.
- They are passively managed and there is no commission fee but there can be management fees.
- ETFs trade like stocks on the stock exchange, with their prices fluctuating throughout the day.
- ETFs follow the market; they don’t try to beat the market.
- They tend to be relatively cheap (compared to mutual funds).
- There are over 1,300 ETFs available, so choosing which ETFs to buy requires knowing what you want in your fund.
Let’s Go A Little More In Depth
Stock Funds – These types of funds purchase common stocks to hold shares of specific companies.
Bond Funds – These types of funds pool money together and invest in specific bonds.
Balanced Funds – These funds have a mix of stocks and bonds that often provide more stability for conservative investors.
Global Funds – These funds invest in foreign markets, and can be appealing when new markets emerge.
Sector Funds – These funds invest money into a specific sector, such as finance, technology, and/or industrial markets.
Index Funds – These funds invest into the major indices on the market, and move as the market moves on a daily basis.
Things To Be Aware Of
There really is no right answer in choosing between an ETF and a mutual fund.
While mutual funds can bring higher fees, they also come with a lot more personal attention and a much higher level of service.
It’s not a matter of one being better for the other. It’s a matter of what’s best for the individual. For people who don’t need any advice, often times buying an ETF on an exchange is a more cost-effective way of investing.
For everyone else, it’s important to know what fees you’re paying and what they’re buying.
Hopefully this provides a little more insight into a few different options as to where and what you can invest your money in.
What do you invest in? Have you started? Let me know below!
Good Luck, Newbies