If you're looking to invest your money, such as your investment capital and you want some exposure to the stock market in hopes of your money appreciating but you're a little more hands off - you might have been looking at mutual funds.
I want to explain the differences between Mutual Funds, Index Funds and ETFs - and how to evaluate them.
What is a Mutual Fund?
A mutual fund takes and cherry picks stocks and creates a basket of stocks for you to invest in.
- They promise they can get you better results than the market.
- Typically charge 1% management fee.
- But there are hidden costs, too. It is expensive for them to do business - so it's important to look at the other costs associated with doing business with them.
- They care about themselves first, and your money is one of the last things on the list.
What is an Index Fund?
Rather than a business actively managing your funds (like a Mutual Fund), Index Funds are a more passive way of managing funds.
- Similar to a basket of stocks
- The index fund doesn't get traded on a day-to-day basis like a mutual fund
- Adjustments to stocks are made once in a while, but for the most parts, funds remain in the primary basket of stocks set up for you
- A lot fewer fees are associated with Index Funds than Mutual Funds
What are ETFs?
ETFs are an Exchange of Traded Funds.
- Again, it's a basket of stocks
- Examples of ETFs: SPY, SPX, IWM, QQQ
Now, each one of these different components is catered for different people, and they all have different risk and reward profiles.
- Easiest method to invest. Give your money to someone, and they take care of it all for you
- Don't need to be involved that much
- Money can be tied up
- Better for people who are slightly more active investors, but not a full-time trader
- Great if you want to contribute consistently a certain amount
- Little more flexible
- Better for people who are active and willing to make their trades themselves
- Can get in and out at any time
- Most flexible strategy, but you need to put in some time doing your homework
So you must take in account what your needs and preferences are and make a decision based on that. Remember, you need to do what is right for you and your cash and not every person will work under your best interest when it comes to your money - so choose wisely!