Category: Mutual Funds

ETFs And Mutual Funds Offer A Wide Variety Of Investment Options

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ETFs and mutual funds offer you the access to a very wide variety of international stocks and bonds. 

So if you choose an ETF or a mutual fund it doesn’t matter if you want to buy an EFT or a mutual fund from USA, Japan, Poland, Brazil or Australia. 

ETFs and mutual funds offer you investing narrowly, broadly and anywhere else in between these two. But it all depends on your personal goals and investing style.

By “investing narrowly” I mean investing for example in a high-dividend stock fund or something like a sector fund-

By “Investing broadly” I mean investing for example in a total market fund.

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ETFs And Mutual Funds Are Less Risky Than Investing In Individual Stocks & Bonds

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Both of these two come to you with a built-in diversification which is amazing and it is to a huge benefit to you and every other investor.

Both an EFT and a mutual fund could include hundreds and sometimes even thousands of individual stocks or bonds in one single place.

This means that if 1 or 2 stocks in that EFT or mutual fund are doing very poorly, it wont affect you that much because there is a chance that other stocks are doing better.

This fact can help you reduce the risk which you are taking on you every time you are making an investment. This can as well reduce your overall losses.

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The Difference Between An ETF And A Mutual Fund

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An ETF is sort of a collection of hundreds sometimes even thousands of stocks or bonds in one single fund.

But Mutual Fund is very similar to an ETF but i would say that a Mutual Fund is for beginners and an ETF is for the advanced investors who have been investing for a while. Mutual Fund is sort of an automate version of an ETF.

However If you want a cheaper fees over time and you don’t mind making contributions every month then you should consider an ETF instead of a Mutual Fund.

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Why Invest In Mutual Funds?

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The reason why you should invest in mutual funds is because they are affordable, simple and they are managed by professionals in the stock market. But mutual funds also very easily diversify your portfolio which you should do. 

Mutual funds are also highly liquid which means that they are easy to buy and / or sell.

Mutual Funds for the most part take all the investing research from you and they do it for you which means that you have more time to use on the things you love to do instead of researching different stock companies and choose between them how much money to put in each company.

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Management Costs With Index Funds

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Some funds may have the same investment goal. But still they have  management costs that can vary wildly. These costs may not seem like a big deal in the short term because they are pretty low but in the long-term investment returns can take a massive hit from the smallest fee inflation. However the thing with big funds is that they have lower fees. 

The main costs to keep in mind about index fund are:

1) Account minimum

A brokerage’s account cost may be $0 but that does not remove the investment minimum for a particular index fund.

2) Investment minimum

This one is about the minimum required to invest in a mutual fund can run as high as a few thousand dollars.

3) Expense ratio

This one are main costs of subtracted from each fund shareholder’s returns as a percentage of their overall investment. 

4) Tax-cost ratio

This the last one to keep in mind. And this one is the addition to paying fees which is all about owning the fund may trigger capital gains taxes if held outside tax-advantaged accounts just as IRA or 401(k)

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How Do Index Funds Choose Their Assets ?

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If you didn’t know, yes. Index Funds together with corresponding index funds create their composed of stocks and other assets by following simple rules they have created for themselves. And these are:

1) Geography.

In this one these funds mainly focus on stocks that can be trade on foreign exchanges or a combination of international exchanges.

2) Asset type

This one focuses on funds that track domestic together with foreign bonds, commodities and cash.

3) Market opportunities

This one is about the emerging markets and sometimes about other nascent but growing sectors for investment.

4) Company size and capitalisation

This one is about the index funds that track all companies no matter if they are small, medium-sized or large companies. This process is also called as “small-, mid- or large-cap indexes”.

5) Business sector or industry

This one rule is about funds that mainly  focus on consumer goods, technology, health-related businesses but also about everything else which you can imagine about a company or a business.

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How To Invest Index Funds

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As I mentioned in my past Index Funds post the Index Funds are an hands-off, diversified, low-cost and very easy to invest in the stock market. 

Index Funds are very easy to buy and right now we will go through it.

Step 1 ) Pick Which Index 

There are many index mutual funds which track various indexes. There are many indexes together with corresponding index funds that are composed of stocks together with other assets that are chosen based on = Asset type, Market opportunities, Company size and capitalisation.

Step 2) Select which index fund you want

When you decide which index you are most interested in, then you need to move to choosing which index fund to buy. 

Keep in mind that low costs are for the most part one of the biggest selling points of index funds. This is because they are cheap to run but also they are automated to follow the shifts in value in an index. But dont assume possible all index mutual funds are cheap.

Step 3)  Decide where to buy the index fund

You can buy index funds for the most part directly from a mutual fund company but you can also buy them from a brokerage.

The same thing is with ETFs aka exchange-traded funds. Which are basically a small mutual funds that trade like stocks throughout the day.

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The Cons And Pros Of Mutual Funds

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There are a lots of pros and cons to every investment you can possibly do now on days. And mutual funds arent any different from other investments.

Of course there are many investors who will say that mutual funds have almost zero cons to it but that not true. Mutual funds have decent amount of cons to it.

Mutual funds are one of the top tools Americans use to grow their wealth and save for retirement. There were over $21 trillion dollars only invested in funds back in 2019 and now on days this amount have more likely grown with at least couple of billions.

Pros To Mutual Funds

Its simple.

Mutual funds are easy to buy and sell. And as well as they are very easy to keep the track of.

Professional management.

All funds are in greater or smaller level managed by professionals whom been in the market field for a while and knows probably much more than you do when it comes to investing.

Which for you means that proffesionals managers in these funds you choose will do the hard work for you

Diversification.

Funds lets you diversify your portolio much faster and easier than most other investments you can do. Because when you buy funds you buy x amount of invidual stocks at once in only one transaction. This means that you buy x amount of stocks from different companies at once.

Cons to Mutual Funds

Annual Fee

If you invest in funds you will need to pay a annuak fee for the running of the fund. This is most known as an expense ratio and the whole idea behind it is based on a small percentage of the total value of your shares.

Lack Of Control

You will not have control over what invidual stocks the fund buys or seels, because it is up ti managers of the funds and that the one who have investent the money in the fund.

Smaller return

Lets say that one or two of the comapnies in that fund is doing amazing and they have a big return. But you who own their stocks through a fund will get a lesser return than a investor who owm their strocks directly and not through funds. Because funds will for the most part use that return to balance out the fund on other stocks.

You arent owning stocks directly

When you are investing in funds you arent owning any stocks but rather giving the money to the fund who owns the stock. And the fund is sort of saying that you own a stock when you invest in funds.

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Mutual Fund Types

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As a beginner in the investing life there are topics which are easier and there are topics which are harder. There are a lots of things to keep in mind and a lots of things to learn and plan. So thats why today we will talk about some different types of mutual funds which will be okay to know about.

There are some mutual funds which put their focus on a single asset class (like bonds or stocks). While some other mutual funds put their focus on investing in a variety of things you and they can invest your money.

Bond Funds AKA Fixed-Income.

This type is less risky than stock funds which I will mention below. But there are more different types of these bonds. This means that you will need to do your research for each mutual fund individually (in this type) in order to determine the amount of risk associated with it you are willing to take.

Stock Funds AKA Equity

This type actually carries the greatest risk alongside the greatest potential returns. Fluctuations in the market can very drastically affect the returns of equity funds.

Equity funds are the most popular type of mutual fund, but still do your research and see if you are willing to taje a lots of risk.

Money Market Funds

This type has the lowest returns because they carry the lowest risk of all the types which have been mentioned.

These funds are required to invest in high-quality and to do short-term investments that are issued by the U.S. government or U.S. corporations.

Balanced funds AKA Asset Allocation Funds / Hybrid Funds / Fund Of Funds.

This type of funds are invest in a mix of stocks, bonds and other securities.

An good example here is the target date fund, which automatically chooses and reallocates assets toward safer investments as you approach retirement age.

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Mutual Fund Fees To Know About

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Most mutual funds have four different structures that will impact the fees you will soon or later pay if you invest in mutual funds.

Each and everyone of these four structures is about different topic in the fund.

Open-end funds

Is about the NAV per share rises and falls with the value of the fund.

Load funds

This one is about paying a sales charge or commission to the broker or salesperson who sold the fund in addition to the NAV share price.

Closed-end funds

This one is about funds having a limited number of shares offered during an IPO, much as a company would.

No-load funds AKA no-transaction-fee funds

This last one is about charging no sales commissions for the purchase or sale of a fund share.

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