I am sure you either have or have heard of these funds listed in the title because they have become popular. What a mutual fund or ETF could be defined as is a large pool of money that is managed by professionals? The main benefit to buying into one of these funds is that you can start out with a little amount. Anywhere from $100 to $1,000 dollars.
You might be asking yourself why shouldn’t I just buy single stocks or bonds? One thing that these funds can do is diversify your funds or help you invest in a specific niche of investments. As an example, if your goal was to get the market return of the S&P 500 and only had $10,000 in account equity, your money would be spread thinly through to many stocks. That is one reason why people go the ETF or Mutual fund instead of buying separate stocks, and bonds. This allows the investor to diversify their money as a group and can lower risk.
This is almost a separate subject but I will mention it here. ETF’s are a tool traders use for leverage or as a way to short markets. This means that you can get a 2X, 3X or inverse fund if you are a trader and it is like you are making trades with margin. Please research these because they are designed for day traders and swing traders and will kill and account if you are an investor.
An open-ended fund is a fund that more people can add money too, so the fund is either getting larger or contracting depending on how much money is being deposited or withdrew.
A closed-ended fund is different because it is traded in shares. Money isn’t added to this fund unless the managers share more shares on the open market. Once the ETF management company issues share through an IPO the shares are sold and purchased on what is known as the secondary market.
What type are Mutual Funds
A mutual fund would fit into the category of an open-ended fund. You actually give your money directly to the investment managers for them to invest. From there they purchase suitable investments for the fund.
What type are ETF’s
I actually trade or invest more often into ETF’s which stands for exchange traded funds. When I purchase shares of an ETF, I am actually buying them on the open market from someone else selling them. Essentially, this is changing ownership from someone else to me.
Advantages of Buying Into these Funds
- A small amount of investment capital required
- A small amount of time is required. Investing in individual stocks is time-consuming.
- You only need minimal knowledge about investing and economics to analyse these funds. Almost any professional advisor can analyse and find the correct fund for you.
- You can be diversified across a whole sector or market (Example SPY is S&P 500)
Disadvantages of these Funds
- You are at the mercy of the managers of the fund. There have been fund managers that screwed up managing these funds.
- You will pay the management company fees.
- Some of these funds are leveraged meaning they borrow investment funds wich makes some of these extremely risky.
There are the major characteristics of these funds. I will add more content on this subject because it is really large. This is only an intro.