Original subtitles

Let's talk about mutual funds and exchange traded funds.

They have a lot of similarities, but they have some key differences.

In particular, if you want to be a more active trader, one of these two is definitely one that you

want to really focus and key in on if you're an active trader and you'll see that as we go through this

lesson.

So first, let's talk about what are the similarities between a mutual fund and an ETF or exchange traded

fund.

So basically, what they both are is they're a basket of securities.

You're buying a whole bunch of something a stock, let's say, for stocks, for example, and that provides

you some instant diversification because you're not buying one stock, you're buying one mutual fund

or exchange traded fund.

And in that it holds a whole bunch of different types of stocks.

So, for example, a famous one is the S&P 500, so that holds the 500 largest United States stocks,

right?

So right there, I'm getting five or eight stocks just by buying one mutual fund or exchange traded

fund.

And you can get the S&P five hundred in both a mutual fund and an exchange traded fund type of style.

Another one would be like the Nifty 50, which is the 50 largest India based stocks based on market

cap.

So but you can also get more specialized like let's say you want to invest in a basket of stocks that

are focused on EVs or electric vehicles, so you can do that.

And that way, I don't have to try to buy 10 or 15 different electric vehicle companies or related companies.

I can just buy the mutual fund or exchange traded fund, get some diversification, and they go beyond

just stocks, too.

They could be, you know, bonds or other types of securities out there.

Gold, whatever it might be, you can find a mutual fund, an exchange traded fund for basically anything.

So the other difference is how actively they're they're traded within their basket of holdings, mutual

funds and exchange traded funds.

They all have fund managers.

You have somebody who's in charge of the investments in that fund, and they usually have a team of

people that work with them to help pick the different investments.

And and it also depends on how active a fund manager they are or if it's more of a passive or index

fund.

So let's let's start with a passive index fund.

So we're talking about that, you know, Nifty 50, the 50 largest Indian stocks.

There is no active management of that.

You just have to buy the 50 largest Indian stocks or the S&P five or the 500 largest U.S. stocks.

And that's all you do.

So it's a very passive index fund, and the managers of index funds is they have a rather much low cost

versus, let's say, an active type of fund.

An active fund is where the fund manager is actively picking stocks, buying and selling constantly,

you know, to have the right mix of stocks.

So maybe that electric vehicle a fund as an example, you might have somebody who is actively managing

the fund and saying, OK, I want to put more weight, put more investment on Tesla and less so on NIO

or some other related type of electric vehicle company.

You know, as an example.

So how active the fund manager is can make a difference between these different funds.

ETFs or exchange traded funds tend to be more passive or index funds, but they don't have to be exclusively.

But you'll see that much, much more often with an ETF that their index funds.

Many people say that index funds, by the way, because they can be low cost, you don't have to pay

that fund manager in a bigger team to really be actively researching and funding are finding stocks

can be a better way to go because it's lower cost and it's hitting more of the average in the market

without trying to beat the market, so to speak.

But they both have their place, so you have active or passive funds.

So in addition to similarities, mutual funds, exchange traded funds, they have costs associated with

them.

It's not a free lunch or whatever.

So there are some costs related to the people who manage that fund.

Active mutual funds are going to be higher cost than index mutual fund mutual funds or exchange traded

funds.

So right now, they're both the same.

We're still with our similarities.

They'll both have what's called the main thing you'll want to look at when evaluating a fund is an expense

ratio, and that's the annual annual percentage to hold the fund.

So if I'm going to buy that fund, I'm going to pay an annual percentage, you know, to hold that fund.

If I sell out before I'll pay a portion of, I sell it halfway through the year because I can buy and

sell at any time, then I'll pay, you know, that's smartly on a smaller percentage of that.

But basically, when you look at the expense ratio, you'll see that that's the annual percent to hold

the fund and you really want to look for something under one percent.

As far as that expense ratio, some are two or three percent, but there's so many different mutual

funds and ETFs out there.

You can find a lot of great funds that are, you know, going to cost you less than one percent.

In fact, there's a lot of great funds that are out there.

You're going to find for less than zero point two, five percent or less or even almost a zero or even

at zero.

I mean, there this is a new thing in the market, you know, so be watching for these ultra low cost

expense ratio funds because I understand that eats away in your return or how much you eventually make,

because each year you're going to have a little bit of money go out for that expense ratio.

But then again, you're getting that instant or first vacation.

Well, one thing you might see out there was what's called a load fee or a sales charge.

They mean the same thing.

Again, this is mostly with mutual funds, though I don't I don't know if you'll see it much, if at

all, with ETFs, but mutual funds, you definitely can see a basic and these are rare.

They're getting rarer now because there's so many good funds that are no load where you don't pay a

load fee or sales charge.

This fee charge is addition on top of your expense ratio, but there are some mutual funds that you

still do.

And basically, it's a fee that you pay.

Initially, that's the extra fee for the privilege, and it is a privilege to buy that particular fund.

Not only are we going to charge you only with an annual fee with an expense ratio, but just to buy

in, we're going to charge you a fee up top.

That's the most common, which is what's called a front end load.

And we usually it's around one to three percent.

So when you buy a mutual fund and it has a front end load, it'll tell you how much it is, but you

might pay one to three percent of whatever you invest right off the top.

And so if I invest, you know, you know, thousand dollars, I would be paying your one percent of

that or $100 us just to buy the fund.

I'm not getting a thing of it is just to buy the fund.

So that's a front end load.

You also can have what are called back end loads where when I sell the fund I get charged to, some

might have only four front and load, some might have only a back and load and some have both.

The key thing is you don't have to buy these types of funds.

There's so many good mutual funds, exchange traded funds that have no loads at all.

So I would highly, highly recommend not buying or not buying a fund that has a load fee or a sales

charge by no load mutual funds and exchange traded funds.

There's many of them out there, thousands of out, though other, maybe tens of thousands.

So but just understand that you be if you see some, that's a load for your sales charge.

That's what it is.

And we look at example here from this global technology fund from from Putnam.

You can see this is when you go on a website for like a mutual fund company or whatever they'll they'll

give you disclosures as far as what are the expenses there, right?

There's usually what's called a fact sheet that tells you about the the fund, its performance and its

expenses.

And you can get this information from there.

And so if you look at the expense this year on this particular Putnam fund, they have an expense ratio

of one point one percent, right?

So it's one point one percent you're going to pay annually for this fund.

So like I said, you can find some under one percent, some even less.

But if you want to fund, that really is focused on technology like this Putnam one, you can buy it.

You'll just have to it.

You'll pay your annual expense ratio 1.1 percent.

The other thing that they're doing, too, is they have a sales charge that's the same as a load, and

they break it up by how much you're investing in the fund itself.

So if you, let's say, have from zero to forty nine thousand nine hundred ninety nine, let's call

it fifty thousand dollars us.

If you invest in the fund, you're going to pay upfront right off the top, just coming right off of

your investment five point seventy five percent.

That's that's really high.

It's really high.

All right.

Now, if you pay more, if you say, Well, I'll give you, I'll give you a two hundred and seventy

thousand.

Well, you can see you can go up to two point five percent or get it down.

And you can see the different amounts there.

So but if you want to, if you don't want to turn this into a no load fund, hey, you only need a million

dollars U.S. and you can pay zero.

Otherwise, if you if you're if you're if you're only investing five hundred thousand dollars, you're

still going to get charged with two percent sales charge.

So now here's the deal There are a million well, not a million, but there are hundreds, thousands

of funds that you can get with that focuses on technology and global technology that doesn't charge

this type of fee.

You'd have to look at their performance, how much you believe in this active fund manager in this particular

thing.

But you know, those are pretty hefty fees, but that's kind of what it would look like.

So let's talk about some differences here, real quick one.

And this is a really a real important part now for if you want to be actively trading stocks because

you can actively trade exchange traded funds, less so with mutual funds.

And here's how it works.

Some mutual funds, as far as how they're traded, is they're traded once per day.

All right.

So throughout the day, you can buy from the mutual fund company right directly from Putnam.

There we're talking about or Vanguard or Fidelity or Schwab or any of these big mutual fund companies

are immune small ones.

And if you buy a mutual fund, it basically the price truths up at one time at the end of the day.

And then you get it at that price and then you hold it.

And then when you sell it, you'll wait for the end of the day, let's say a weeks from now, you're

years from now, and that'll be the price one time per day.

So you can't actively really buy and sell it throughout the day.

If you're a day trader, for example, you can't date trade mutual funds because it's only one time

per day.

You can't go in and out of them now with an ETF or exchange traded fund.

That's where that name comes in.

They're traded on a stock exchange.

They basically trade just like individual stocks.

So if I want to buy a stock and then sell it 10 minutes later, I could do that if I wanted to buy an

exchange traded fund and then sell it 10 minutes later.

I can do that.

You can trade them, you can trade them as much as you want.

They're very liquid means they're easy to buy and sell throughout the day, so you don't have to wait

till the end of the day.

So if you're looking to be, you know, more about where you're focusing on actively trading, you know,

that's where ETFs really shine the shine with low costs, particularly if they're an index fund and

they shine as far as something that's being able to trade in and out of the day.

So if you're a scalper or trader or somebody you might want to trade more frequently or don't want something

that might plummet in a day because the whole, let's say, electronic vehicle industry went down in

a day in your mutual fund with down, you want to be able to sell it on the day not winning billion

a day, then the ETF may be for you because that is a big difference.

The other thing is minimum purchase.

You know, mutual funds you're buying from the fund company, you know, they can set their minimum

purchases and say, you can't buy this fund unless you come up with a certain dollar amount or rupee

or a pound or euro, whatever your currency is.

So like that Vanguard S&P fired or mutual fund?

This is the mutual fund part of Vanguard, the S&P 500 largest stocks.

The minimum investment is three thousand dollars, right?

So you need to come up with $3000 just to buy, you know, one share of that fund.

Now they have an exchange traded version of that fund.

The Vanguard S&P 500 ETF and you can see how their ticker is different video versus VFR X.

That's how they that's how they separate them.

And so you can buy an eight exchange traded fund that tracks the exact same S&P five hundred five,

the largest stocks exactly the same, and you can find this with pretty much anything.

So to buy one share, you're buying it on a stock exchange, you're buying it through your stockbroker

and you pay whatever it's selling for.

I might be selling for $20, you know, or a $400 or $30.

You don't have to come up with that minimum three thousand dollars.

You could buy one share or two share whatever you wanted to do.

So again, gives you more flexibility with the exchange traded fund.

So in summary, basically, if you're an active trader, you don't want minimums, you want to be able

to trade it.

Maybe you want to trade something, then ETFs are for you, then you.

Really want to focus on ETFs, if you're more of a buy and hold investor, might buy a mutual fund and

hold it for a long period of time, particularly, look at those expense ratios, too.

If you're on a whole team for a long period of time, then you can buy mutual funds or ETFs.

You could buy either one.

And this is why ETFs are really growing in popularity.

Low cost in many cases and that flexibility and you don't have these minimums.

So there are mutual funds out there, people and mutual funds.

There's nothing wrong with mutual funds, but ETFs kind of came out of the mutual fund industry as far

as another alternative where people could buy and sell on exchanges.

So either way, no, we're on that trading spectrum.

You know, you can.

ETFs will work and work very well.