Mutual funds are investment vehicles that are made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds can be very beneficial to investors who want to begin investing but might not have the knowledge and capital to do so. This is because when you purchase mutual funds your money is pooled together with other investors and then used to purchase securities. The fund is then managed by a professional who then decides which securities to buy sell or hold. 

 

Mutual funds also offer some diversification due to the large pool of securities they invest in. You should however research the sectors and holdings of any Mutual fund before you invest, to alleviate the risk of investing in funds that might hold similar securities, thus defeating the goal of diversification.  About seven out of ten mutual funds underperform the market. But some mutual funds do beat the market.

 

Exchange Traded Funds (ETFs):  are securities that track or mimic the performance of an index, commodity or basket of assets. ETFs are similar to index funds but the only difference is that they trade like stocks on an index, meaning they experience price changes throughout the day as they are bought and sold. Because they trade like stocks they do not have their NAV (Net Asset Values) calculated at the end of the day like mutual funds. They can also be shorted, bought on margin and purchased in a single share.

 

 

Types of ETFs:

 

• Index based ETFs: these are ETF’s that track an index or the securities that trade on that index. Examples of some index based ETF’s are the SPDR or “spider”  ETF which tracks the S&P 500, and the NASDAQ Q which tracks the NASDAQ index. ETS’s usually post the investments they hold on their websites daily.

 

• Actively Managed ETFs: these are ETF’s that are managed by a manager who seeks to outperform a certain index or market. An actively managed ETF manager may buy or sell securities on a regular basis to help achieve stated investment objectives.

 

 

Benefits of using ETFs:

 

ETF's offer diversification

 

 

How to evaluate ETFs:

 

ETF’s can be evaluated the same way you will evaluate mutual funds, but always ensure that the ETF’s you decide to invest in fits with your overall investment strategy and approach.

 

Before you decide to invest in an ETF read both its summary prospectus and its full prospectus, which provide detailed information on the ETF’s investment objective, principal investment strategies, risks, costs, and historical performance.