Category: Finance

finance

What is the Difference between Mutual Fund and ETF

Both Mutual funds and ETFs are basket of individual stocks, however, ETFs are actually a hybrid between mutual funds and stocks, with a main caveat that one can buy or sell ETFs throughout the trading day unlike mutual funds that only trade once after stock market closes.

As both Mutual Funds and ETFs are basket of individual stocks or bonds, they are overall considered safer investments than individual entities. There really is no substantial difference between the two if you are investing for long-term time frame. However, there are some fundamental differences between the two as noted below.

Trading Time

ETF can be bought or sold at any time while stock market is open. If you are looking for a precise entry and exit time-point then ETF are better than mutual funds which can only be traded after stock market closes.

Fluctuating Price

ETF prices fluctuates throughout the time stock market is open. If you are looking for a precise entry and exit price-point then ETF are better than mutual funds which can only be traded after stock market closes.

Choice Flexibility

Mutual Funds have much longer history and provide lot more choices to invest than ETFs. However, ETFs are becoming increasing popular lately.

Fees Impact

ETFs generally have lower management fees compared to mutual funds. A small difference in fees can have huge impact for those investing for long-term time horizon.

Periodic Returns

Mutual funds generally provide returns (profit) in the form of capital gains and dividends. ETF on the other hand provide returns mainly on dividends.

Tax Implications

ETFs are considered more tax efficient than Mutual funds. Mutual funds generally have more transactions (buying and selling shares) that may result in capital gains that are taxable, even for those who may not have performed such transactions. Thus it is preferable to invest in ETFs in a taxable account and Mutual funds in tax-friendly accounts like 401k, IRA and Roth IRA.

Advance Trading Techniques

ETFs can be purchased on margin or sold short. These are advanced trading techniques that have unique risks and thus are not recommended for beginners.

Final Verdict

Though both Mutual Funds and ETFs investment is considered safer than individual company stock or bond investment, there are fine differences between the two. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.

We hope the information in this post will be helpful in your journey of aspiring nirvana!

Complete Beginners guide to understanding Exchange-Traded Funds (ETF)

An Exchange-traded Fund (ETF) allows you to invest in a basket of individual stocks or bonds with relatively lower risk.

What is an Exchange-traded Funds (ETF)

An Exchange-traded Fund (ETF) is a type of investment in which a group of individuals pool their money to buy a basket of stocks or bonds, that are selected and managed by a professional investment team. When an individual buys an ETF share, that money in invested in stocks or bonds held within the ETF.

Why should I invest in ETF

ETFs provides an easy option to diversify across multiple investments for those individuals who are not interested in researching and buying individual stocks or bonds. It is specially handy for those who are new to investing or want hands-off approach. Additionally, you get a professionally managed team that runs the ETF based on a specific goal.

How can I buy ETF?

The easiest way to buy ETF is by opening an account in an online brokerage firm. You start by depositing cash in your account, research on what ETF you are interested, buy and hold them, and sell as per your financial needs.

What are different types of ETFs

There are multiple types of ETF, each designed to meet a specific investment goal:

  • Stock ETFs – Invest in company stocks from certain industry, country, or region.
  • Bond ETFs – Invest in bonds from corporation, government or municipality.

What are the advantages of ETFs

Advantages in investing in ETFs are:

  • Convenience – You can buy or sell ETFs any time during the day on stock exchange
  • Diversification –  You hold a variety of stocks/bonds at a lower risk and cost than individual ones
  • Professional Management – A professional team will manage individual stocks/bonds within the ETF

What are the disadvantages of ETFs

Bear in mind that you will be paying a fee to the professional team to manage ETF. This fee will impact the overall return of your investment. Additionally, you will have no control over the individual stocks or bonds within the ETF. Remember, ETFs are not FDIC insured, meaning unlike Bank CDs, you may lose your money in the investment.

How do I manage risk of investing in ETFs

There are multiple options to lower risk of ETF investing:

  • Buy Index-based ETFs that tracks an index (Ex. S&P 500)
  • Buy ETFs of an industry or country with which you are familiar
  • Employ Dollar Cost Averaging, that involves buying ETFs with a fixed dollar amount each month

What is the difference between ETF and Mutual Fund

Exchange-traded funds (ETFs) are a hybrid between mutual funds and company stocks, with a main caveat that one can buy or sell ETFs throughout the trading day unlike mutual funds that only trade once after stock market closes.

Final Verdict

Though ETFs investment is considered safer than individual company stock or bond investment, they do charge fees that may lower expected returns. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.

We hope the information in this post will be helpful in your journey of aspiring nirvana!

Helpful Links: https://en.wikipedia.org/wiki/Exchange-traded_fund

Beginners Guide to Understanding Mutual Funds

A mutual fund allows you to invest in a basket of individual stocks or bonds with relatively lower risk.

What is a Mutual Fund

A mutual fund is a type of investment in which a group of individuals pool their money to buy a basket of stocks or bonds, that are selected and managed by a professional investment team. When an individual buys a mutual fund share, that money in invested in stocks or bonds held within the mutual fund. Any profit (or loss) made by the fund is periodically distributed to the individual investors.

Why should I invest in Mutual Fund

Mutual funds provides an easy option to diversify across multiple investments for those individuals who are not interested in researching and buying individual stocks or bonds. It is specially handy for those who are new to investing or want hands-off approach. Additionally, you get a professionally managed team that runs the fund based on a specific goal.

How can I buy Mutual Fund?

The easiest way to buy mutual fund is by opening an account in an online brokerage firm. You start by depositing cash in your account, research on what mutual fund you are interested, buy and hold them, and sell as per your financial needs.

What are different types of Mutual Funds

There are multiple types of mutual funds, each designed to meet a specific investment goal:

  • Stock Funds – Invest in company stocks from certain industry, country, or region.
  • Bond Funds – Invest in bonds from corporation, government or municipality.
  • Target-Date Funds – Invest in a mix of stocks and bonds targeted for a specific retirement date

What are the advantages of Mutual Funds

Advantages in investing in mutual funds are:

  • Convenience – You can buy or sell funds on any business day
  • Diversification –  You hold a variety of stocks/bonds at a lower risk and lower cost than individual ones
  • Periodic Returns – A fund may provide periodic profit on your investment
  • Professional Management – A professional team will manage individual stocks/bonds within the fund

What are the disadvantages of mutual funds

You will be paying a fee to the professional team that manages the fund which may impact the overall return on your investment. Additionally, you will have no control over the individual stocks or bonds within the fund. Remember, mutual funds are not FDIC insured, meaning unlike Bank CDs, you may lose your money in the investment.

How do I manage risk of investing in mutual funds

There are multiple options to lower risk of mutual investing:

  • Buy funds that are rated high quality
  • Buy funds of a category that you are familiar with
  • Buy Target-Date funds as per your retirement needs

Final Verdict

Though mutual funds investment is considered safer than individual company stock investment, they do charge fees that may lower expected returns. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.

We hope the information in this post will be helpful in your journey of aspiring nirvana!

Helpful Links: https://en.wikipedia.org/wiki/Mutual_fund