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