Fear, lack of knowledge, and insufficient funds.
As astonishing as it may sound, the problem is real. They may seem like issues faced by teenagers, but these are, in fact, problems faced by potential and new investors. And if you are here looking for solutions, I promise, you won’t be disappointed. This blog highlights how you can fully utilize your hard-earned money without confusion. The two most popular investment options – ETFs and Mutual Funds, are discussed at length here to give an idea about what suits you and your pockets.
Wait.
If those two terms didn’t ring a bell for you. If you still believe that locking your money and forgetting about it for a fixed time is a good idea. Then, my friend, you need to know why investing is essential.
Investing your money in Fixed Deposits was good when we didn’t have options like today. Not only do we have enough opportunities to invest our money, but plenty of options do not require hefty amounts. Investing is no longer a rich person’s business. If you look at it closely, money is like our brain. You need to put it to good use to make the most of it. And making the best use of your savings is to invest it.
Let’s see how you can multiply your money by investing in ETFs and Mutual Funds.
ETFs
An Exchange Traded Fund (ETF) is a type of pooled investment security that functions similarly to a mutual fund. ETFs typically track a specific index, sector, commodity, or asset. ETF can be bought and sold on an exchange like regular stocks. ETFs can be configured to track anything from the price of a single commodity to a sizable and diverse collection of securities. ETFs can also be structured to follow definitive investment strategies.
While ETFs give you access to many stocks across various sectors, there is a higher fee for actively managed ETFs. Another disadvantage is the need for liquidation that hinders transactions. If you have an ETF focused on industry, it will also limit your scope diversification.
Mutual Funds
‘Mutual funds are subject to market risks’ is something that everybody is familiar with; still, most of us need to learn what precisely mutual funds are and how they are risky.
A mutual fund is an investment platform that raises money from multiple investors and invests those funds in various financial assets such as bonds, stocks, stocks money market instruments, and gold.
Mutual funds are managed by investment professionals who allocate these funds to generate income for the investor and gains on his capital. Small or individual investors can access professionally managed stocks, bonds, and other securities through mutual funds. As a result of which, each shareholder participates equally in the fund’s gains or losses.
Simple, right? So, where’s the risk?
Mutual funds are tricky because there are no guaranteed returns. It all depends on the market behavior. You could lose money as these kinds of investments are volatile, and there are daily price fluctuations. Along with this, it could also be affected by any event in the stock.
What is the best choice for you?
Choose ETFs if:
- You are an active trader, and your choices are intra-day trades, top orders, options, and short telling.
- You are tax-sensitive. ETFs are generally more tax efficient, allowing the investor to keep more of the money they make.
Choose Mutual Funds if:
- You invest at frequent intervals (like monthly). Mutual funds are reliable that way; every month, you can pot a fixed amount of money and be done with it.
- You have high hopes that the stock will surpass the benchmarks and want to do less with the market volatility.
Conclusion
Investors have a wide range of choices, and deciding whether to go for a mutual fund or an exchange-traded fund (ETF) may seem trivial compared to all others, but they have crucial differences. Both mutual funds and ETFs hold portfolios of stocks and bonds, sometimes more exotic such as precious metals and commodities. They must adhere to the same rules about what they can own, how much they can concentrate on one or several holdings, how much money they can borrow relative to the size of their portfolio, etc. Beyond these elements, the path diverges. Some differences may be subtle, but these differences may make one type of fund or another more suitable for your needs.
While there is risk in everything we do, making a start is crucial. Similarly, whatever you decide to go forward with ETFs or Mutual Funds, it is vital that you start investing your money to gain the benefits. The key here is to only invest the principal amount you are okay with letting go of. Anyone can be a good investor by keeping a few simple things in mind, like, not putting all the eggs in a single basket, ensuring that you have an emergency fund, and evaluating your comfort with taking risks.
This quote by Shelby M.C. Davis answers many questions from investors, and it is best to conclude the article with this, “Invest for the long haul. Don’t get too greedy, and don’t get too scared.”
