Mutual Funds vs ETFs (1)
Last time we have brought up 4 different ways to start investing, while picking stocks requires the most time and experience amongst those. As such, this option might be highly achievable for investment newbies. Are you looking for stepping stones? The market has got a lot on offer, for us to diversify risks and adjust our portfolios.
To minimize your risks, selecting different products from various categories is surely worth considering. Realistically speaking, the most ideal number of products ranges from 15-20. So in order to keep things simple, choosing mutual funds or ETFs could be the obvious answer. The main selling point of those is that a single product has already covered a few assets, while there are some recognizable differences.
Mutual funds are comparatively more of a prolonged history, which professional fund managers aggregate investors’ capital to further invest. Most mutual funds adopt the “active management” method, as the manager will be actively trying out different investment techniques to beat the market. Investors have to buy or sell the stock holdings in that fund, directly from the fund provider. Plus, the trades are settled at the end of every day.
There are a few benefits of selecting mutual funds. First and foremost, as professionals are analysing and choosing the best options for you, it can definitely free up your time. It can as well lower your risks, since you are performing diversification by investing in an array of global institutions. Investors are free to buy funds from a wide range of fund distributors - such as banks, brokers, and financial advisors. However, as your capital is in good hands with the professionals, the costs would then be much higher. On the other hand, if your funds are being overbought that in turn causes the size of the fund to increase, it would be very difficult to manage your holdings.
On a separate note, ETFs belong to a relatively modern side of funds. As passive management is being adopted, they are usually index funds that track the market index. Similar to the normal stock market, we would then buy or sell stocks from other investors. Since trades can be settled at any time of the day, the flexibility of ETFs is much more outstanding.
Likewise, ETFs can also diversify your risks. Investors purchase the stocks included in that index in one go, so as to prevent your capital being poured into one single stock. Most importantly, the costs made to investors are much lower than that of mutual funds. Hence, this is the main reason for the trend in an exponential increase of ETFs investors. Considering the benefits, there are still some risks that we have to be aware of. Due to the fact that the passive management is adopted, the value of ETFs falls when the index being tracked goes down. Investors must then be careful with the potential loss. Besides, ETFs may not fully cover all stocks proportionally in that index, thus the movement of it may not 100% follow the index performance.
Now that we have compared the good and bad about mutual funds and ETF, let’s move on to active and passive management in our next blog. Stay tuned!