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What are Mutual Funds, Index Funds, ETFs and How to Scan Them

April 7th, 2015

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.
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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
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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.

Overview:

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Mutual Funds:

  • 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

Index Funds:

  • 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

ETFs:

  • 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!

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Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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