Mutual funds are among the most popular financial assets in the United States. According to Statista, there were about more than 9,599 mutual funds in the US that managed more than $17.7 trillion.
In contrast, the US economy has a GDP of more than $21 trillion. In this report, we will look at what these funds are and how to trade them.
What is a Mutual Fund?
Mutual fund is a financial asset that pools money together and invests it in various assets like stocks, bonds, and other securities. A single mutual fund can invest in more than 100 stocks.
A common goal of these funds is to achieve long-term success and to minimise risks in the market. For example, if you have invested in a single stock, the risk of losing money is usually higher than if you have invested in three companies.
Mutual funds are usually housed by big asset management companies like Vanguard, PIMCO, and Blackrock. Each fund is put under the management of an asset manager, who has a team behind it.
An important concept of a mutual fund is the net asset value, which is the total value of the assets held in a mutual fund divided by the number of outstanding shares.
Mutual Funds vs ETFs
Mutual funds are often confused with exchange traded funds (ETFs), which are similar diversified assets. A key difference between the two is that ETFs are usually like stocks. This means that they are offered by many brokers and that they can be traded relatively easily.
Types of Mutual Funds
Active and Passively-Managed
There are several types of funds. There are active and passively-managed mutual funds. Active funds are where the portfolio managers buy and sell stocks on a regular basis.
A passively-managed fund is those whose goal is to track another index. For example, there are funds that track the Dow Jones and the S&P 500.
The types of assets
Another example of mutual fund depends on the types of assets involved. There are those funds that focus on stocks and others that focus on bonds.
On stocks, there are funds that focus on technology, financial, and utilities. Also, there are other one that are categorised into their geographical regions like Asia and Europe.
How to trade Mutual Funds?
Unlike stocks, ETFs, forex, and commodities, mutual funds are relatively difficult to trade. In fact, they are not usually offered by most brokers like Robinhood and Cash App. While it is possible to buy and sell the funds in the open market, most people prefer to buy them from the mutual fund providers.
In addition to where they are offered, trading in this asset has other challenges. For example, most providers have a set of conditions that must be met for one to trade the funds. Some have a minimum amount of money you can spend on the funds. This amount ranges between $1,000 to $10,000.
When do Mutual Funds Trade? How they are priced?
Perhaps, the most important factor that makes trading mutual funds difficult is how they are priced. For example, the price of a stock and an ETF is usually quoted throughout the trading day. On the other hand, these funds are usually priced in after the market has been closed.
Another important aspect about trading these funds are the fees charged by the providers. Among the most popular fees are back-end load, level-load, front-end load, and the expense ratio.
Trading mutual funds can be a difficult thing. Furthermore, these funds are not created with short-term traders in mind. Instead, they target people who want to invest today and cash out after many years.
Therefore, if you are a new trader, we suggest that you focus only on highly liquid assets like stocks, exchange traded funds, commodities, and currencies.