A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
Who should invest in an ETF?
ETFs are low-cost means of gaining exposure to the stock market. They offer real-time liquidity and settlement since they are listed on the stock exchange and trade, just like stocks. ETFs track a stock index, offering diversification instead of investing in a few stocks of your choice.
ETFs offer flexibility in how you want to trade, such as short selling or buying on margin. ETFs also provide access to a number of alternative investment options such as investing in commodities, foreign indices and international stocks. You can also use options and futures to hedge your position that is not available with mutual fund investments.
However, ETFs are not suitable for all investors as they require a deep understanding and knowledge of the market. That’s why index funds are a better option for new investors who want to experience the benefits of long-term equity investing without having to choose specific stocks.
Choosing the right ETF requires in-depth knowledge of the financial market compared to what most retail investors own. So, a bit of hands-on investment style to manage your ETF investments is a must.