Mutual Funds – Aspiring Nirvana

Beginners guide to investing in Index Funds

An Index fund is a group of individual stocks that is designed to mimic the composition and thus performance of a sector within a stock market.

Index Funds

Individual stock picking can be overwhelming to many folks for varies reasons including number of choices, time commitment, volatility, financial acumen and so on. For such individuals picking an index fund for investment is the best and easiest choice.

What is an Index Fund?

An Index fund is a group of individual stocks that is designed to mimic the composition and thus performance of a sector within a stock market. The most famous index funds are based on companies that makes up S&P 500. By investing is an index fund that mimics S&P 500, you get access to 500 stocks, thereby reducing volatility of returns.

Index funds also enables an investor to compare how their specific investments are doing compared to an index.

There are many index funds that mimics different sectors of the stock market. One can choose index funds that are focused on specific group like country, international, bonds, or a sector. One can also choose an index funds that is either a mutual fund or Exchange Traded Fund (ETF).

Advantages of Index Funds

Investing in index fund is considered one of the best way of passive investing. Investing is an index fund reduces volatility of returns. Index funds usually have one of the lowest fees. You can be assured that your returns will be similar to the overall market.

Disadvantages of Index Funds

With index funds you will get returns similar to the market but will not beat the market. To get above average returns you may have to invest in high-risk individual stocks. Although index funds usually have low fess but some may have higher fees that will hinder your returns.

Final Verdict

Investing in an index funds allows an individual to get easy access to the overall market.

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

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!

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