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Dissecting Investment Vehicles Part 2: ETF and Mutual Fund

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by ShareInvestor

 

In the second part of the Dissecting Investment Vehicles miniseries, we introduce you to Exchange Traded Funds and Mutual Funds.

Exchange-Traded Funds (ETF)

An ETF is structured as a fund that tracks an index, such as the FBMKLCI, and is similar to a Mutual Fund, but is traded like a stock in an Exchange, whereas Mutual Funds are not listed or traded on the Exchange.  As owning shares to all 30 counters forming the FBMKLCI costs a lot, trading ETFs makes it relatively inexpensive to invest in the FBMKLCI yet receive the same Returns.  The Brokerage and Commissions charged for trading an ETF is the same as trading Stocks/Shares.

The Risk Level and Returns of ETFs is lower than Stocks, as it is less Liquid than Stocks, and also because the Profit and Loss of the different companies in the ETF offset each other.  Initial Capital Requirements are similar to Stocks, where the minimum is 1 Board Lot (100 Units/Shares).

Mutual Fund

Mutual Funds are generally for those who have minimum knowledge of investing, or simply have no time to manage their own investments.  It allows investors to have a diversified and managed portfolio at a relatively lower cost.

The Mutual Fund, usually named according to its investment objective(s) stated in the prospectus, pools funds from many investors and is managed by professional Fund Managers to achieve the investment objective(s).  The number of Fund Managers managing each Fund varies, depending on the size of the Fund, and the Fund Managers are normally assisted by a team of Analysts.

The Fund Managers invest the pooled funds in different investment products to achieve the investment objective(s) stated in the prospectus.  Mutual Funds have varying degrees of risk, depending on its objective and where the Fund Managers invest in.  Mutual Funds have a management fee and also a commission payable to the agent who sells the Fund.

The Risk Level and Returns of Mutual Funds range from moderate to high, depending on the objective and portfolio of the Fund.  Liquidity depends on if the Fund is an Open-End Fund or Closed-End Fund.  Malaysia’s Mutual Funds are mostly Open-End Funds.  The Initial Capital Requirement is generally a minimum of RM1,000.