top of page

What is a mutual fund?

A mutual fund is an investment strategy where you pool your money with other investors, to purchase stocks, bonds, or other investments within the stock market.  Often called a portfolio. The price of the mutual fund is determined by the total value of the securities in the portfolio, divided by the number of funds standing. This is also known as NAV(net asset value). The price of the mutual fund fluctuates at the end of the day. (1)  The investors in the funds don't own the actual securities, they only own the shares of the mutual fund. Mutual funds are basically like buying many stocks, except it is grouped together into a fund.

(1) What does this mean?
Stock like Apple, Amazon, Microsoft, etc. trades during the day. So.....What does that mean? 
You can buy a stock of one of the above stocks at any part during the open market.

For example, Jeff buys 1 share of apple at 10 AM. He then sells that 1 share at 2 pm. You cannot do that with mutual funds, because they only trade at the end of the day. So, buying 1 share of a mutual fund at 10 am will be the same as buying it at 2 pm that day. 

This leads to our next segment, ETFs.

 

What is an ETF?

An ETF, or an exchange-traded fund, works much like a mutual fund, except you can buy or sell it throughout the day just like any stock. An ETF can be structured to track anything from the price of an individual stock or commodity to a large and diverse collection of securities. Also, ETFs can be structured to follow individual stocks, commodities, and more. The first ever ETF was the SPY(SPDR) ETF which tracks and follows the S&P 500.

Basically, an ETF is a basket of securities that get traded throughout the day like any normal stock. The ETF share price fluctuates throughout the day. ETFs don't have to only be stocks, they can also be bonds, and many other types of investments. These offer lower expense ratios, as well as you don't have to pay all of the commissions that you typically would with a broker(many brokers no longer have commissions). 

There are many different types of ETFs; Passive and Active, Bonds, Stocks, Industry sector, Commodity, Currency, Inverse, and Leveraged ETFS.  

Diversification

There must be diversification within funds to maintain a healthy portfolio. Equity funds, bond funds, hybrid funds, and money market funds are the main ones and ideally the best ones to look at. Funds are typically made up of different stocks and securities, so they are typically lower risk than individual stocks and are more diverse but it is still important to have different kinds of bonds for safety reasons. 

bottom of page