ETF vs mutual fund: what you should know

If you’re not investing in the stock market, it’s time to fix it! A properly assembled portfolio of securities will not only help to save what you’ve accumulated, but also to provide you with additional income from diversified sources. Investing isn’t difficult if you know where to put your money

One of the most reliable instruments at the moment are funds. Let’s figure out what’s the difference between a mutual fund and exchange-traded fund and find out what is more profitable in the market now! There are several times more mutual funds than ETFs on the market competing for your investments, so let’s see which is more appropriate in your situation.

Mutual funds 

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A mutual fund is a form of collective investment that allows an investor or a shareholder to become the owner of a fund’s share, thereby gaining access to its portfolio. 

The main task of the fund manager is to invest the shareholders’ funds in a certain portfolio of securities. The choice of assets in the portfolio is determined by the goals and strategy of the fund. For example, for a fund whose purpose is to ensure minimal risk at a given yield, fixed–yield instruments are suitable.

It’s customary to distinguish two main types of mutual funds: open (Open-End Fund) and closed (Closed-End Fund). 

The closed-end fund has a limited number of issued units (shares) that became available after its first public offering. They are traded on global stock exchanges at a price that may differ from the net asset value (NAV) per share. The price depends on the ratio of supply and demand in the market and the main indicators of the fund itself.

Most mutual funds are open-ended. They have no restrictions on the issuance of new shares and are available to all investors. An open mutual fund issues new units based on the current net asset value (NAV) and repurchases the units that the investor has decided to sell.

What is an ETF?

An ETF is an exchange-traded fund that tracks an index, bonds, precious metals, or other assets. 

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Exchange-traded funds allow you to invest in many assets in one swoop, for example. You can also invest in bond indices, REITs, broad market indices, or, conversely, individual industries (for example, invest in biopharmaceuticals or the oil industry).

An investment fund buys a large diversified portfolio of assets and then sells it in parts. To do this, the fund issues its own shares. That is, by buying one share of an ETF, an investor invests money in several attractive instruments at once.

You can earn money on an ETF as follows: 

  • purchase, — investment in a broad stock market, a separate country or group of countries, an economic sector or industry, or a group of assets;
  • buying dividend ETFs;
  • short sale;
  • buying “volatility” — this fund is based on an index consisting of short-term VIX futures, so it doesn’t always exactly repeat the movements of the VIX index itself.

In general, an ETF is a very convenient and important tool for an investor. It allows users to diversify and protect all invested funds.

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What’s the difference between ETF and stock? 

Despite the presence of some similarities, these two tools are different in the following points: 

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  1. Diversification. By buying 1 share of a fund, you acquire tiny shares of all the shares owned by this fund. Thus, the bankruptcy of one of the companies does not threaten you with the loss of all your funds.
  2. Method of ownership. Unlike ordinary shares, you don’t own shares of a company directly. You won’t be able to participate in voting and shareholder meetings. 
  3. Commissions. Exchange-traded funds charge a certain management fee. For large funds, it’s usually small, but it is still present. For example, the commission may be 0.1% per annum. 
  4. Purchase of mutual funds is only possible at the closing of a trading day at its net asset value, while ETFs are available for intra-day trading.

ETFs are great for investors who don’t want to overtake the market. The selection of individual stocks requires certain experience and skills from the investor, but at the same time, such a portfolio can yield much more than the market average. 

Is investing profitable?

There’s a rule that every novice investor needs to accept: the higher the potential return, the higher the risk. Those who are just entering the market often begin to evaluate assets by determining their profitability. But such a method can lead to a decrease in capital or even a complete loss of it.

Investing, of course, is profitable, but only in cases when the client clearly knows the nuances of the market and understands all the details. 

Investments are an opportunity to make your money work for you and generate additional income. The main thing is to define a goal, study the rules of working with different assets, form a strategy, and stick to it, cutting off emotions!

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