In this video, we're going to be discussing
mutual funds, index funds,
we're going to talk about the differences,
and how they work.
You can think of a fund kind of like a basket of stocks.
Instead of trying to find the perfect company to invest in,
you can invest in a fund,
which gives you exposure to a whole bunch of stocks.
So if you invest in an individual company
and it goes bankrupt, well, now you lose everything.
This is where funds come in handy,
kind of like the S&P 500, which gives exposure
to the biggest 500 companies in the stock market.
So a fund is a way for you to lower your risk
by investing in a group of companies instead of just one.
A mutual fund is a fund
that's actively managed by a money manager.
Now there's going to be a money manager
who's going to be investing your money for you
into a whole bunch of different companies.
Mutual funds have the highest fees,
because now you're paying for a money manager
to actively manage your money.
So it's not uncommon to see a mutual fund
charge you between 0.5% and 2.5% in fees
to manage your money,
and this is money you have to pay
every year on your assets,
whether you make money or you lose money.
Some mutual funds will have minimums.
They will say that you have to invest
a minimum of, say, $500 or $1,000
to invest in a mutual fund,
but you'll also see other mutual funds
lift their minimum requirement
so they no longer have a minimum to invest.
Now, depending on how you purchase your mutual fund,
you might be able to trade it easily like a stock,
or you might not be able to trade it so fast.
If you buy a mutual fund directly
from the investment company that's issuing the mutual fund,
you might not be able to trade it more than once a day.
But if you buy a mutual fund from a brokerage
and this mutual fund is trading like a stock,
well, then you'll be able to trade it
much easier throughout the day.
Some of the biggest pros of a mutual fund
is it allows you to diversify your money,
so you're not investing in just one company,
you're investing in a basket of stocks.
And the second pro
is you don't have to find the best investment yourself,
you have a money manager
that's working to invest your money for you.
But some of the biggest cons with a mutual fund
is your fees are very high.
The expense ratio on a mutual fund
are a lot higher than the other funds,
because you're paying for a money manager
to actively manage your money.
And the second con is many money managers
cannot outperform the market
year after year after year.
An index fund is similar to a mutual fund
where it's a basket of stocks that you can invest in,
but unlike a mutual fund,
it's not managed by a person,
it's managed by a computer,
so the fees with an index fund are significantly less.
For example, you have index funds,
they give you exposure to the S&P 500,
which is the biggest 500 companies in the stock market.
If a company falls out of the S&P 500, it becomes smaller.
Well, then your computer will automatically
kick that company out of your index fund,
and it'll bring it a new company.
So your fees are significantly less,
and now you can get exposure to the general stock market
or an index in the stock market
and pay less money and fees.
Most index funds will have a minimum money requirement.
Some index funds might require $1,000,
some may require more, some may require less,
but again, kind of like mutual funds,
index funds require you to invest this money.
But some index funds are starting to lift
this minimum requirement.
When you buy an index fund,
you're purchasing the price of an index fund
at the close of the previous day,
because index funds are not actively traded
throughout the day,
so you don't get to see the real-time prices
the way you can a stock.
Some of the biggest pros of an index fund are,
again, you get diversification
because now you're not investing in just one company,
you're investing in a basket of stocks,
and it's passive.
You don't have to manage your investments;
you have a computer
that's managing investments for you.
Some of the biggest cons with an index fund are, one,
you're limited to how often you can buy
or sell your index funds,
and, second, many index funds do have a minimum investment,
which means that you might not be able
to buy into an index fund
if you don't have enough money to buy into it.
The goal with an index fund is often to match the market.
When you invest in an index fund
that gives you exposure to the general market,
all you're trying to do is get the returns of the market.
When you invest in a mutual fund,
your goal is to beat the market.
But the risk with that is that many money managers
will not be able to outperform the market,
especially after you factor in the fees
year after year after year.
If you're not willing to put in the work
to research companies, keep up with earning statements,
you should not be investing in individual companies,
because now you're not keeping up with the company.
In your case, it'll be much better
for you to just invest in an ETF or an index fund.
That way, you can get the returns of the market
without paying the higher fees.
And the key for you to succeed
with any of these strategies
is you have to be investing your money for the long term,
and you have to consistently be investing your money,
whether the market is up or down.
You want to stay consistent,
and you want to make sure this is completely passive.
That way, you stay investing your money consistently
for the long term.
That's how you win in this game.