Mutual funds and ETFs: Why you may want to jump in the pool

Great flexibility makes mutual funds and ETFs popular among average investors.

Mutual funds

A mutual fund consists of multiple securities that are bought using money pooled from many investors. The fund is run by a fund manager, or a team of managers, who use the pool of money to build the fund’s portfolio. As a fund investor, you own a piece of the fund’s total portfolio. You share in any growth or loss, and in any income paid by the fund’s investments. Each mutual fund share represents an investment in anywhere from a few dozen to several hundred different securities, so it’s a convenient way to diversify. The fund will usually follow a particular investment strategy such as long-term growth. Details about a fund’s investment strategy, the fund manager, and more can be found in the fund’s legal disclosure, called a prospectus. It’s a good idea to read it thoroughly before investing.

Exchange-traded funds

Exchange-traded funds, or ETFs, are like a mix between a mutual fund and a stock. They’ve enjoyed a surge in popularity because they offer some of the benefits of both, and they’re affordable. Compared to regular mutual funds, their management fees may be lower because ETFs mirror a particular market index or segment using a passively managed style, Unlike mutual funds, which are valued and traded only at the end of the day, ETFs are bought and sold throughout the day, like individual stocks and bonds. Lower management fees need to be balanced against any trading fee you may have to pay when buying and selling ETFs. As with a mutual fund, read the fund’s prospectus thoroughly before you invest.

Talk to a pro

Talk to a financial professional to learn more about the different types of mutual funds and ETFs — including stock, bond and money market funds, and whether passive and or active fund management is right for you.