Diversified exposure to asset classes can get expensive. But investment funds allow investors to hold stakes in sets of securities instead of purchasing them individually. Investment funds are basically predetermined baskets made up of various securities. These include stocks and bonds.
There are different types of funds. Investors use some more widely than others.
Types of Funds
Here are three main types of investment funds.
Exchange-Traded Funds (ETFs)
New fund launches are overwhelmingly ETFs. ETFs are baskets of securities that are sold in shares, just like stocks. But, when you purchase an ETF, you purchase partial shares of dozens to hundreds of stocks. Like stocks, ETF shares trade on an exchange between two investors. There are also different kinds of ETFs, such as the following:
- Bond ETFs offer the opportunity to focus on various bonds across or within specific sectors
- Industry ETFs track an industry such as the financial or technology sectors
- Currency ETFs focus on foreign currencies
- Commodity ETFs invest in different physical commodities like gold and oil
Mutual funds are professionally managed portfolios. They trade once a day on the Net Asset Value (NAV) of the whole fund. And they’re bought and sold directly with the mutual fund company. Many, however, consider mutual funds to be more outdated.
Index Funds are baskets of securities that contain most or all of the funds within a specific index, such as the S&P 500.
ETFs, mutual funds and index funds can be open-end, which typically trade once per day on the NAV. Or they can be close-end and trade more like stocks, not limited to the NAV.
Recently, some argue that mutual funds, for example, are outdated compared to newer, more innovative ETFs. Because you can trade ETFs at any time (a process known as intra-day trading), unlike mutual fund transactions that are processed once a day, there’s more trading flexibility. Actively managed mutual funds typically charge high fees, as well, and they’re not as tax-efficient as ETFs. Coupled with a lack of transparency (most investors don’t even know what’s inside their mutual funds) and a history of underperforming, and many industry insiders root against mutual funds these days.
People have been investing in mutual funds for nearly a century, and there’s no doubt that they offer diversification, affordability, and typically low minimum investment thresholds, which ultimately means that they’re accessible for all-level investors. But, over time, investors have explored newer investment vehicles. As the financial services industry grows and becomes evermore dynamic, investors need to ask themselves if these funds are still as attractive to them, compared to other options, as they once were.