You’ve decided that you’re ready to invest. You want to save for your retirement years. You want to make sure that you’re financially comfortable long after you’ve quit working.
This is a commendable goal. But now the real work begins: You have to decide in what investment vehicles to sink your money. Two worthwhile contenders for your dollars are mutual funds and Exchange Traded Funds. Both provide the diversification that is so important when investing. And neither ETFs or mutual funds come with exorbitant costs.
So which investment vehicle is best for you? That depends on your investing goals and your personal financial situation. But here are some basics about both mutual funds and ETFs to help you decide which makes the most sense for you.
When you’re putting your money into a mutual fund, you are often paying for a team of investment managers that decides which stock stocks to buy and which to sell. The hope, of course, is that the stocks in your fund perform well. These are considered safe investments because your money is spread out over a wide range of stocks.
ETFs work a bit differently. These funds track a specific index. Usually, a large company – often the same ones that run mutual funds – will create a grouping of stocks that represent a specific index, anything from the NASDAQ to the S&P500. These stocks are deposited with a holder, and the company behind the ETF receives a certain number of what are called creation units. These units are large blocks of shares that are eventually split up into the individual shares that are then traded on the market.
Which investment vehicle makes the most sense for you? That depends on what you’re looking for.
With mutual funds, you generally buy your shares and hold onto them for a long period of time. With ETFs, though, you can buy and sell as many times as you’d like. This can be exciting. It can also be risky. Just ask all those people who lost tons of money by day trading.
Mutual funds generally come with minimum payments for entry. You have to buy a certain amount of shares to participate, and for some funds this minimum isn’t tiny. But ETFs don’t require any minimums. In other words, you can buy as few shares as you’d like.
There is no right or wrong answer here. Both ETFs and mutual funds are generally considered to be strong investments. Their differences, in fact, aren’t all that significant. Before investing your dollars in either vehicle, though, make sure to do your homework. You can make solid money with either ETFs or mutual funds. Unfortunately, you can lose a lot of money with either investment vehicle, too.
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