Overview
This lecture explains investment funds, reviews their main types (mutual funds, index funds, ETFs, hedge funds), describes how each works, and discusses how to choose an appropriate fund for your needs.
What is a Fund?
- A fund is a pool of money collected from many investors to buy a variety of assets like stocks and bonds.
- Investing in a fund allows you to own parts of many assets with just one purchase.
- Some funds are managed by professionals who charge fees for their services.
- Funds provide diversification, reducing the risk of investing in just one asset.
Types of Funds
- Mutual Funds: Professionally managed; can be actively or passively managed; not traded on stock exchanges; often require $500–$5,000 minimum investment; charge annual expense ratios (0.5%–1.5%).
- Index Funds: Passively managed to match an index (like the S&P 500); lower fees, usually under 0.5%; can be structured as mutual funds or ETFs.
- ETFs (Exchange-Traded Funds): Traded on stock exchanges during market hours like stocks; minimum investment as low as one share; mostly passively managed; very low fees.
- Hedge Funds: For wealthy investors; require high minimum investment (from $100,000+); take bigger risks for higher returns; actively managed and aggressive strategies; not publicly traded.
Comparing Fund Types
- ETFs are the most flexible and beginner-friendly with low investment minimums and fees.
- Mutual funds offer professional management but less flexibility, higher minimums, and higher fees.
- Hedge funds are only accessible to wealthy, experienced investors and carry higher risks.
- Passively managed index funds and ETFs often outperform many actively managed funds over the long term due to lower fees and consistent strategy.
How to Choose a Fund
- Choose ETFs for low costs, flexibility, and small starting amounts.
- Mutual funds may suit those wanting less day-to-day tracking if minimums and fees are acceptable.
- Hedge funds are suitable only for experienced, wealthy investors willing to accept high risk.
- Consider fund performance, management style, fees, and minimum requirements before investing.
Key Terms & Definitions
- Fund — A pool of money from multiple investors to buy a range of assets.
- Mutual Fund — Professionally managed investment fund, can be active or passive.
- Index Fund — Fund designed to replicate the performance of a specific market index.
- ETF (Exchange-Traded Fund) — Fund that trades like a stock on exchanges, usually passively managed.
- Hedge Fund — Aggressively managed investment fund for wealthy investors, using complex strategies.
- Expense Ratio — Annual fee charged by a fund as a percentage of assets managed.
- Net Asset Value (NAV) — Price per share of a mutual fund determined at market close.
Action Items / Next Steps
- Review your financial goals to determine which fund type fits your needs.
- Check minimum investments and expense ratios of funds you are interested in.
- Research fund performance and management style before making any investment.