Hey there! Most people know that investing is important, but you realize that lots of people avoid investing. The reasons are mostly not good enough at analyzing and choosing stocks or investments. Well, there’s a solution to that worry! Which is just investing in funds! You might have heard the word like mutual funds, hedge funds, index funds, ETF, and all other funds. So, in this video, we will talk about what is a fund, the types of funds, how does the fund work, and how to choose a fund for your investment! Let’s jump in! Section 1. What is a fund? Even though a mutual fund, index fund, ETF, hedge fund, and other types of funds are different, they all have the same concept which is a fund. Imagine, you are hungry now, and want to eat some snacks. You notice there’s different types of snacks available like cookies, candies, chips, and crackers with each costing $2. But you only have $2, which is good enough to buy 1 snack. You also worry whether if you buy just 1 snack will it taste good? If it tastes bad then you just waste your only money. So, you ask 3 friends to put in $2 each. Now you have $8, enough to buy all the snacks. You and your friends can share and enjoy everything together. If the cookies taste bad, no problem, there are 3 other snacks to enjoy. That’s the simple logic of funds! A fund is like a pool of money where your money and other investors’ money are collected and used to buy a variety of assets like stocks, bonds, cryptocurrency, and more. For example, let’s say there’s a fund company called WeeWee Fund. WeeWee Fund has $50 and decides to invest $10 each in 5 companies: Apple, Microsoft, Google, Tesla, and Nvidia. So, each company then makes up 20% of the total portfolio. Now, let’s say you decide to invest $5 in WeeWee Fund. Your $5 gives you a fraction of the fund, which means your money is spread across all five stocks. So, it means that your $1 of your $5 is invested in each of the companies. So, by just buying 1 fund, you can own shares of these 5 companies! Sounds good, right? Of course, in reality, most funds hold hundreds to even thousands of stocks! For example, if you invest $1 into The Vanguard’s VTI ETF, it means with just 1 transaction, your $1 can already own more than 3,600 stocks! So, instead of buying stocks one by one, a fund can offer you like a big bag that full of stocks! Some types of funds are managed by professional investors who handle everything for you, but of course it’s not free, and you need to pay a fee to the fund manager. But the good thing is, you don’t need to do deep research and keep watching the stocks because someone is doing it for you! But wait! Did I just say some types of funds have professional investors? Does that mean other types don’t? Well, that’s what we’ll talk about in the next section. Section 2. Types of funds. As I mentioned earlier, you’ve probably heard a term like mutual funds, ETFs, index funds, hedge funds, and more. But what exactly are they, and how do they differ? Let’s break it down! The first type is mutual funds. A mutual fund pools money from many investors and is managed by a professional fund manager. The manager will decide how to invest the money by buying and selling stocks, bonds, or other assets to achieve the fund's goals. Mutual funds can be actively-managed or passively-managed. If mutual funds are passively managed, they’re often called index mutual funds, which we’ll explain in the next section. If the mutual fund is actively managed, then it means the fund manager monitors investments daily, aiming to maximize returns or minimize losses. And of course, this daily monitor is not free. They charge annual fees called expense ratios, which range from 0.5% to 1.5% of your investment. For example, if you invest $1,000 in a mutual fund with a 1% expense ratio, you’ll pay $10 per year and you must pay the 1% expense ratio every year even though your investment grows or even drops. However, mutual funds don’t trade on stock exchanges like individual stocks. You can only buy or sell mutual funds after the stock market closes, and the price is set based on the day’s closing value or the last value before the stock market closes which is called the net asset value or NAV. And also, mutual funds often have a minimum investment requirement, which can vary. For example, most actively-managed mutual funds might require around $500 to $5,000 to invest and that’s why actively-managed mutual funds are not really friendly to beginners. Some of the famous actively managed mutual funds are like Vanguard’s VPMAX, Fidelity’s FBGRX, T. Rowe’s TRBCX, and much more. Now, the second type is index funds. If most mutual funds are actively managed, index funds are passively managed. Index funds are designed to match the performance of a specific index. So, what is an index? It’s a list or group of investments, usually based on their size, sector, or other criteria. For example, the most famous index which is the S&P 500 Index includes the 500 largest companies listed on U.S. stock markets, like Apple, Microsoft, and Amazon. If you invest in an S&P 500 index fund like Vanguard’s VFIAX, your money will be used to buy stocks from all 500 companies in the index. The index fund manager doesn’t care whether the companies are good or not, as long as it’s in the S&P 500 index then they’ll just buy the stocks. If, let’s say a company name ABC Company which is listed as the 500th biggest company in the S&P 500, then the index fund will buy all companies in S&P 500 list including ABC Company’s stock. If the ABC Company got replaced by DEF company and it went down to 501st place, then the index fund will just sell the ABC Company and use the money to buy DEF Company. So why do people buy index funds? Because they’re easy to understand. For example, the S&P 500 index represents about 80% of the total U.S. stock market value. So, if you believe the U.S. economy will continue to grow, you might invest in an S&P 500 index fund. Or, if you think technology companies will perform well, you might choose a Nasdaq 100 index fund, which focuses heavily on technology companies. Because index funds are passively managed which mean the fund managers are not watching the market every time, their fees are usually very low, mostly under a half percent, which is great if you’re on a budget! Index funds can come in two styles: as mutual funds or ETFs. If the index fund is in mutual fund style, it just as same as mutual funds which can only be traded after the stock market closes. The difference is only the index mutual fund is passively managed and just follow the index list. Famous example of index mutual funds like Vanguard’s VFIAX, Fidelity’s FNILX, Schwab’s SWPPX, and much-much more. And how about the ETF style? Well, we’ll talk about it in the next part! The third type is ETFs or Exchange-Traded Funds. An ETF is a type of fund that can be bought and sold on the stock exchange during trading hours, just like individual stocks. You can buy or sell ETFs anytime using a stock trading app, and most ETFs have minimum investment requirements as low as $1 or 1 share, depending on your stock trading app and broker. This makes ETFs very beginner-friendly and easy to use. ETFs come in two styles: actively managed and passively managed. However, most ETFs are passively managed, like index funds that follow a list of companies based on specific categories or performance. That’s why, when people talk about ETFs, they’re usually referring to passively managed ones. Some examples of passively managed ETFs include, Vanguard’s VOO, which follows the S&P 500 index. So, if you want to invest in the S&P 500, you can buy Vanguard’s VOO. Don’t like VOO? No problem! There are plenty of other ETFs that also follow the S&P 500. You can also invest in Invesco’s QQQ, which tracks the Nasdaq 100 index and focuses on technology companies, or Vanguard’s VT, which invests in both U.S. and international stocks. There are even ETFs like VanEck’s SMH, which focuses solely on semiconductor companies like TSMC and Nvidia. Some ETFs even invest in cryptocurrencies like Bitcoin. Interesting, right? As mentioned earlier, there are also actively managed ETFs, such as ARK’s ARKK, Fidelity’s FBCG, and T. Rowe’s TCHP. And you might notice the expense ratio is higher because it’s actively managed. Then, the fourth type is hedge funds. A hedge fund just like a mutual fund but for the ultra-wealthy and experienced investors. While mutual funds might require a minimum investment of $500 to $5,000 then hedge funds often have minimums from $100,000 to several millions of dollars. Not only that, hedge funds are very aggressive! They take bigger risks in hopes of higher returns. This can include investing in complex investments strategies, short-selling stocks, or even betting against the market. Because of this, hedge funds are usually actively managed. Some examples of hedge funds are Bridgewater Associates, Citadel, and Millenium Management. Well, those are the explanations of the four common types of investment funds. To wrap up, here’s a summary table comparing these funds. Feel free to take a screenshot! Now, let’s continue to the next section! Section 3. Which fund is the best? After learning about these four types of funds, you’re probably wondering: Which fund is right for you? Which one could make the most money? Let's find out! First, let’s talk about convenience. If you want something flexible and easy to trade, ETFs might be your best choice! You can buy and sell them during stock market hours, just like individual stocks, using a trading app. If you’re looking for an easy-to-use trading app, Moomoo is a great option. It’s an online platform where you can trade stocks and ETFs with low fees. Plus, if you sign up through the link below, you can get up to 15 free stocks when you make a deposit and earn an 8.1% APY on your idle cash. On the other hand, mutual funds (including index mutual funds) can also be traded using stock trading app but they are less flexible since they’re only priced at the end of the trading day, so you can’t trade instantly like ETFs. But if you are not a fan of seeing your investment go up and down throughout the day, mutual funds might offer peace of mind. Hedge funds, meanwhile, are for ultra-wealthy, experienced investors and are not publicly traded like ETFs and mutual funds. Next, let’s discuss minimum investment and expense ratio. If you’re starting small, ETFs are perfect as they have no minimum investment requirements and the lowest expense ratios. Mutual funds are good too but often come with higher minimums and expense ratios. Hedge funds? Unless you have thousands or millions to invest, they’re probably out of reach. Finally, let’s talk about performance, the most exciting part! You might think actively managed funds or hedge funds deliver the best returns, right? Well in some countries, it might be right! But in the U.S., the data show that passively managed index funds or ETFs often outperform many actively managed mutual funds and hedge funds in the long term. Wait… WHAT? That sounds illogical, right? How can simply following a list of indexes beat professional fund managers? Well, before we continue, it doesn’t mean that passive index fund or ETF always beat the actively managed mutual funds and hedge funds. As you can see here, some actively managed funds still beat the passive index funds, but there’s also a significant number of actively managed funds that underperform the passive index funds. So, why does this happen? Well, the reason is that beating the market or performing better than everyone else in the investment world is extremely hard. Actively managed mutual funds and hedge funds can indeed outperform index funds and ETFs, but most of them struggle to do so consistently. On the other hand, passively managed index funds and ETFs aim to grow slowly but steadily over time. And also, the higher expense ratios or fees of actively managed mutual funds and hedge funds, which can add up over time and reduce your overall returns, especially if their performance isn’t strong. Meanwhile, passively managed index funds and ETFs, with their super-low expense ratios, have minimal impact on your investment. So, actively managed funds can offer higher return but with higher risk, while passively managed funds offer lower returns but with lower risk. So, in conclusion, you now know what funds are, how they work, the different types available, and how to choose the right one for your investment. Funds are a great option for beginners and experienced investors alike because they simplify investing, offer diversification, and can be used to reach your financial goals. And remember, every investment has risks. Always do thorough research before making any investment, whether in mutual funds, index funds, ETFs, or hedge funds. If you want me to make other videos explaining these topics, please like and subscribe. Thanks for watching.