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.
Net Value
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). While the two seem similar, they have several differences. An ETF is a fund that is listed in an exchange that people can buy and sell. The fund tracks a single asset or a combination of many.
For example, there are ETFs that track a single asset like gold while others track thousands of assets. There are two main types of ETFs: passive and active. A passive ETF tracks a ready-made ETF. For example, Invesco QQQ tracks the Nasdaq 100 while the SPY ETF tracks the S&P 500.
An active ETF, on the other hand, has a portfolio manager who selects financial assets to invest in. A good example of this is Ark Innovation Fund (ARKK). Active ETFs tend to have a higher expense ratio than passive funds.
A mutual fund, on the other hand, is an investment vehicle made up of a portfolio of stocks, bonds, and other securities. These funds are overseen by a portfolio manager.
A key difference between a mutual fund and an ETF is that ETFs are provided by regular brokers like Robinhood, Schwab, and Ameritrade. They are traded just like stocks.
Mutual funds vs dividend funds
Another common question is on the difference between a mutual fund and dividend funds. A dividend fund is a type of ETF that is aimed at generating returns through dividends. They are funds that focus on companies that have a higher dividend yield.
One of the best-known dividend funds is the Schwab US REIT ETF which tracks the biggest REIT companies in the US.
A mutual fund can have companies that don’t pay a dividend. Also, as mentioned above, there is a difference between a mutual fund and an ETF.
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.
Good ways to analyze them are with a Renko Chart and the Ulcer’s Index, a trading indicator developed for this asset.
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.
Transaction Fees
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.
Day trading alternatives
As mentioned above, it is impossible to day trade mutual funds. It is also not ideal to trade exchange-traded funds (ETFs).
Instead, we recommend that investors focus on more liquid financial assets like stocks, commodities, currencies, and cryptocurrencies.
Final thoughts
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.
External useful Resources
- Is It Possible to thade M.F. for a Living? – Investopedia
- 12 Best Brokers and Robo-Advisors in 2020 – Nerdwallet
