This is the last article in the section of online of our 40 different ways to make money online series which I began on the 10th of November. I started the online trading section on the 28th of November, and now, about a month after, we are done.
I hope I haven't rushed things -hope you learnt something new? Anyway, even if it seems I am going too fast now, I assure you that this is only a foundation, and subsequently (either on this blog or the final project,) you will better appreciate this foundation I have laid. I will build on this foundation on future posts on any of these ways of making money online.
What are Mutual Funds? What are ETFs? How are they different or better as investment options from other investments? How can you trade them online?
What are Mutual Funds?
A Mutual Fund, like it's name implies, is a fund of funds from so many different people pooled together to be invested on their behalf by an expert/professional, in securities such as stocks, indexes, bonds, and so on.
Mutual funds are considered a very safe form of investment as it involves diversifying investors' funds over a wide class of assets as against investing in only one. say the stock exchange, or real estate, or bonds only.
A proper definition is something like this "An investment vehicle that is 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 managed by a professional called a money manager.
The value of a mutual fund is calculated daily in what is called NAV (Net asset value) or NAVPS (Net Asset Value Per Share). And it is the the value of the fund's assets minus its liabilities. To calculate the NAV per share, simply subtract the fund's liabilities from its assets and then divide the result by the number of shares outstanding.
The first retail index fund, First Index Investment Trust, was formed in 1976 by The Vanguard Group, headed by John Bogle; it is now called the Vanguard 500 Index Fund and is one of the world's largest mutual funds, with more than $100 billion in assets as of January 31, 2011.
Mutual funds are generally classified by their principal investments. The four main categories of funds are money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds may also be categorized as index or actively managed.
There are typically three (3) types:
- Open-ended (legally, a Mutual fund is called an open-ended company): Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. Most open-end funds also sell shares to the public every business day; these shares are also priced at net asset value.
- Closed-ended: Closed-end funds generally issue shares to the public only once, when they are created through an initial public offering. Their shares are then listed for trading on a stock exchange. Investors who no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an open-end fund). Instead, they must sell their shares to another investor in the market.
- Unit investment trusts: a type of investment company that typically makes a one-time "public offering" of only a specific, fixed number of units. A UIT will terminate and dissolve on a date established when the UIT is created (although some may terminate more than fifty years after they are created). UITs do not actively trade their investment portfolios.
Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange; they have gained in popularity more recently. While the term "mutual fund" may refer to all three types of registered investment companies, it is more commonly used to refer exclusively to the open-end type.
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| Credit: ishares.com |
What are ETFs?
An Exchange-traded Fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index.
They are generally more specific, like shares, so that you can have a stock ETF, Index ETF, Currency ETFs, Gold ETF, or an Oil ETF.
An ETF is often structured as an open-end investment company, though ETFs may also be structured as unit investment trusts, partnerships, investments trust, grantor trusts or bonds (as an exchange-traded note). Most ETFs are index funds that combine characteristics of both closed-end funds and open-end funds.
One of the most widely known ETFs is called the Spider (SPDR), which tracks the S&P 500 index and trades under the symbol SPY.
Popular Nigerian ETFs include NewGold ETF, Stanbic IBTC ETF 30, and Vetiva Griffin 30 ETF.
Check out this useful post on avoiding common errors when investing in ETFs. This forbes link too has a couple of resources on the best ETFs in the world that you can invest in.
Differences between a mutual fund and an Exchange-Traded Fund (ETF)
- Generally, while both are a 'basket' of diversified securities, mutual funds are mostly open-ended investments (i.e. investments sold to the public), while ETFs are purely investment instruments.
- Mutual funds are traded at the close of the day after it's NAV has been calculated, while ETFs can be bought or sold real-time like shares.
- Mutual funds have more expenses associated with them, including handling fees and commissions called 'load', taxes and other expenses which effectively reduces the return on investment for the investor (as those expenses, sometimes as high as 3%, are deducted from returns). ETFs are low-cost and easily accessible like shares, more tax-efficient, and cheaper to hold/invest in (less fees and expenses).
Advantages over other equities traded online
- They offer a less risky form of investment especially since they are diversified investment portfolios, as against investing in only shares, or only index funds, or bonds alone, and so on. They are therefore ideal investment options for retirement accounts/pension fund managers. But beware, some ETFs might not truly be diversified especially when their already points to the class on asset it is based on e.g. Index ETF or Gold ETF.
- They also offer the 'average' investor (-ordinary man on the street) a cheaper way of investing in companies that they ordinarily will need a lot of cash to invest in and make substantial returns from, for example, Berkshire Hathaway, Apple, Nestle Nigeria, etc.
- They are professionally managed funds actively (not passively), so in theory you are better off investing in them (-trusting your money to the professionals) than investing in it yourself. Though you can trade ETFs personally through a trading platform.
In Nigeria, popular mutual funds include First Bank's Mutual fund, Stanbic-IBTC's Mutual fund, and many others. While you can trade most international mutual funds online through a trading platform, we are yet to get there in Nigeria. It is instructive to note that many Nigerian pension fund managers invest their pension funds in a similar way to a mutual fund, i.e. pension funds are held in a mutual fund.
For more on Nigerian ETFs, check out this thisday online article.
So that is it for now on online trading. I encourage you to take just one of all these investment vehicles that I have enumerated on in the past one month, and study it well, preparing yourself to make money in and with it.
Don't forget that you don't need to become an online trader at all. Just find an expert or professional and get him/her to make money for you by investing in any, through them. My specialty is Forex, and I trade for people.
Some investment books you can read to increase your knowledge on trading the two:
- How to Read a Mutual Fund Prospectus: A Practical Guide to Getting the Most Out of a Mutual Fund Prospectus, Lemke, Thomas P.
- Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle (the one that turns the light bulb on!)
- The Bogleheads’ Guide to Retirement Planning
- The Bogleheads’ Guide to Investing
- Mutual Funds For Dummies, 6th edition by Eric Tyson (he means index mutual funds)
- Index Investing for Dummies by Russell Wild (funny and good technical stuff)
- ETF Investing for Dummies by Russel Wild
- The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk, Bernstein, William
- Unconventional Success: A Fundamental Approach to Personal Investment Swensen, David F.
We continue next in the series with HOW TO MAKE MONEY IN INTERNET MARKETING.
I say a MERRY CHRISTMAS to every single reader of The Sijinius.com blog. Have a wonderful holiday season.
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