An investor’s introduction to ETFs and mutual funds

Abdullah’s first steps into investing came via his elder brother’s advisor, who was guiding him into investing in mutual funds. Checking out his portfolio, Abdullah was surprised at how simple it seemed. Pooled funds, or investments that combine money from several individual investors into a single entity give access to investment opportunities that otherwise might be beyond their reach, with optimal costs. Mutual funds and exchange traded funds (ETFs) are both examples of such pooled funds.

Pooled funds are preferred as an investment vehicle because:

• They open investment opportunities that might not be available to individual investors.
• The pooled nature also impacts the cost of entry in the investors’ favor.
• Pooled portfolios can build in diversification to benefit from a range of investments.
• The diversification strategy also works to minimize the risk for each investor.
• They are overseen by professionals who choose and monitor the assets for investment.

Should you opt for ETFs or mutual funds?

Historical performance: Mutual funds have a longer history because, unlike ETFs that were introduced in the 1990s, mutual funds began in 1920. This is important because it enables investors to evaluate performance.

Managed actively or passively: Typically, mutual funds are actively managed whereas ETFs track a market index or sector sub-index.

Flexible trading: ETFs function like stocks in that they can be traded at any time during the day, whereas mutual funds can only be purchased at the end of the trading day.

Minimum requirement: Depending on the fund and the company, mutual funds come with a higher minimum investment requirement than ETFs because they rely on research, effort, and manpower to be actively managed.  

Share trading: In a mutual fund, shares are only traded by the fund manager, while ETFs can be traded between investors.

Why are both ETFs and mutual funds suitable for beginners?

For those beginning their investment journey, ETFs and mutual funds are good choices because they are handled by experts and still provide an investor exposure to a diversified portfolio at relatively low risk.

The benefit of professional management comes in the form of the best risk-return balance while meeting the fund’s goals. Time-poor investors don’t need to build a bank of knowledge just to invest.

Once you set aside capital for the pooled fund, you can opt to reinvest dividends and earnings into additional fund shares.