Basics

Want to invest in Mutual Funds and ETFs? See how it works.


Investors often turn to mutual funds and exchange-traded funds (ETFs) 📈📉 to save for retirement and other financial goals. Although mutual funds and ETFs have similarities, they have differences that may make one option preferable for any particular investor. So, in this article we will guide you to understand mutual funds and ETF investing, how each investment option works, the potential costs associated with each option, and how to spot a particular investment.

🎯  We expect to help you invest in forex efficiently and improve your results. Get extra forex trading insights from leading finance experts on the trading Academy and on our free Telegram channel.

What you can learn ahead 🎓

  • How mutual funds work
  • How ETFs work
  • Types of Mutual Funds and ETFs Companies
  • Common Features of Mutual Funds and ETFs
  • Different Types of Mutual Funds and ETFs
  • Alternatives to ETFs and Mutual Funds
  • How to invest with AI and improve your performance

What is a Mutual Fund and how it Works 🔬

A mutual fund is an investment company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities, or some combination of these investments. The combined securities and assets the mutual fund owns are known as its portfolio, which is managed by a registered investment adviser.

💡📌 Each mutual fund share represents an investor’s proportionate ownership of the mutual fund’s portfolio and the income the portfolio generates.

Investors in mutual funds buy and sell their shares from the mutual funds themselves. Mutual fund shares are typically purchased from the fund directly or through investment professionals like brokers. In the USA 🇺🇸, mutual funds are required by law to price their shares each business day and they typically do so after the major exchanges close. This price – the per-share value of the mutual fund’s assets minus its liabilities- is called the NAV (net asset value) 💰.

Mutual funds must sell and redeem their shares at the NAV that is calculated after the investor places a purchase or redemption order. This means that, when an investor places a purchase order for mutual fund shares during the day, the investor won’t know what the purchase price is until the next NAV is calculated.

Types of Mutual Funds and ETFs Companies 🏦

Open-end investment companies or open-end funds, which sell shares continuously, purchased from, and redeemed by, the fund (or through a broker for the fund);

Closed-end investment companies or closed-end funds, which sell a fixed number of shares at one time (in an initial public offering) that later trade on a secondary market;

Unit Investment Trusts (UITs),  which make a one-time public offering of only a specific, fixed number of redeemable securities called units and which will terminate and dissolve on a date that is specified at the time the UIT is created. Mutual funds are open-end funds. ETFs are generally structured as open-end funds, but can also be structured as UITs.

These are the 3 Biggest Mutual Fund Companies in the U.S.

Understanding fees of Mutual funds 🧐

As with any business, running a mutual fund involves costs. Funds pass along these costs to investors by charging fees and expenses. Fees and expenses vary from fund to fund. A fund with high costs must perform better than a low-cost fund to generate the same returns for you.

📌 🤔 Even small differences in fees can mean large differences in returns over time. For example, if you invested $10,000 in a fund with a 10% annual return, and annual operating expenses of 1.5%, after 20 years you would have roughly $49,725. If you invested in a fund with the same performance and expenses of 0.5%, after 20 years you would end up with $60,858.

It takes only minutes to use a mutual fund cost calculator to compute how the costs of different mutual funds add up over time and eat into your returns.

How ETFs Work ⚙️💹

Like mutual funds, ETFs are registered investment companies that offer investors a way to pool their money in a fund that makes investments in stocks, bonds, other assets, or some combination of these investments and, in return, to receive an interest in that investment pool.

📌  Unlike mutual funds, however, ETFs do not sell individual shares directly to or redeem their individual shares directly from retail investors. Instead, ETF shares are traded throughout the day on stock exchanges and at market prices that may or may not be the same as the NAV of the shares.
ETF sponsors enter into contractual relationships with one or more Participants – financial institutions which are typically large brokerages. Usually, only Authorized Participants purchase and redeem shares directly from the ETF. Also, they can do so only in large blocks (e.g., 50,000 ETF shares) called creation units, which usually “pay” for the creation units in an in-kind exchange with a group or basket of securities that generally mirrors the ETF’s portfolio.
Once participants receive the block of ETF shares, they may sell the ETF shares in the secondary market to investors. An ETF share is trading at a premium when its market price is higher than the value of its underlying holdings, or at a discount when its market price is lower than the value of its underlying holdings. Like a mutual fund, an ETF must calculate its NAV at least once every day.

What is the difference between ETFs and ETPs? 🔦

ETFs are just one type of investment within a broader category of financial products called exchange-traded products (ETPs), which constitute a diverse class of financial products that seek to provide investors with exposure to financial instruments, financial benchmarks, or investment strategies across a range of asset classes. ETP trading occurs on national securities exchanges, making it widely available to market participants including individual investors.
Other types of ETPs include exchange-traded commodity funds and exchange-traded notes (ETNs), which are structured as trusts or partnerships that physically hold a precious metal or that hold a portfolio of futures or other derivatives contracts on commodities or currencies. ETNs are secured debt obligations of financial institutions that trade on a securities exchange and the payment terms are linked to the performance of a reference index or benchmark.

Common Features of Mutual Funds and ETFs

Some common features of mutual funds and ETFs are described below.

😉 Whether any particular feature is an advantage or disadvantage for you will depend on your unique circumstances. Remember to always be sure that the investment you are considering has the features that are important to you.

Professional Management 👏

Most funds and ETFs are managed by investment advisers who are registered (i.e. SEC in the USA, FCA in the UK).

Diversification 👏

Spreading investments across a wide range of companies or industry sectors can help lower risk if a company or sector fails. Many investors find it less expensive to achieve such diversification through ownership of certain mutual funds or certain ETFs than through ownership of individual stocks or bonds.

Low Minimum Investment 👏

Some mutual funds accommodate investors who don’t have a lot of money to invest by setting relatively low dollar amounts for the initial purchase, subsequent monthly purchases, or both. Similarly, ETF shares can often be purchased on the market for relatively low dollar amounts.

Liquidity and Trading Convenience 👏

Mutual fund investors can readily redeem their shares at the next calculated NAV minus any fees assessed on redemption, on any business day. Mutual funds must send investors to pay for the shares within seven days, but many funds provide payment sooner. ETF investors can trade their shares on the market at any time the market is open at the market price. ETF and mutual fund shares traded through a broker are required to settle in two business days.

Costs Despite Negative Returns 😢

A disadvantage of mutual funds and ETFs is that investors must pay sales charges, fees, management fees, and other expenses, regardless of how the mutual fund performs. Investors may also have to pay taxes on any capital gains distribution they receive.

However, because of the structure of certain ETFs that redeem proceeds in kind, taxes on ETF investments have historically been lower than those for mutual fund investments.

📌 It is important to note that the tax efficiency of ETFs is not relevant if an investor holds the mutual fund or ETF investment in a tax-advantaged account, such as an IRA or a 401(k).

Lack of Control 😢

Investors in both mutual funds and ETFs cannot directly influence which securities are included in the funds’ portfolios.

Potential Price Uncertainty 😢

With an individual stock or an ETF, an investor can obtain real-time (or close to real-time) pricing information with relative ease by checking financial websites or by calling a broker. By contrast, with a mutual fund, the price at which an investor purchases or redeems shares will depend on the fund’s NAV, which the fund might not calculate until many hours after an order has been placed.

Factors to Consider Before Investing in Mutual Funds or ETFs

When it comes to investing in mutual funds and ETFs, investors have thousands of choices. Before you invest in any mutual fund or ETF, you must decide whether the investment strategy and risks are a good fit for you. You should also consider more generally whether the unique style of investing in the mutual fund’s or ETF’s sponsor is a good fit for you.

Determine your financial goals and risk tolerance

The first step to successful investing is to figure out your current financial goals and risk tolerance—either on your own or with the help of an investment professional.

Beware of risk

All investments carry some level of risk. An investor can lose some or all of the money he or she invests—the principal—because securities held by a fund go up and down in value. Dividend payments may also fluctuate as market conditions change. Mutual funds and ETFs have different risks and rewards. Generally, the higher the potential return, the higher the risk of loss.

Consider the sponsor’s investing style

Before you invest, you may want to research the sponsor of the mutual fund or ETF you are considering. The sponsor’s website is often a good place to begin, and it is helpful to spend some time browsing through the website to get a better understanding of the sponsor’s underlying philosophy on investing. Each sponsor has its own style of investing that will affect how it manages its mutual funds and ETFs. It is helpful to understand each sponsor’s style of investing, so you can better choose the right investment for you.

Ask and check

Before you engage an investment professional or purchase shares of a mutual fund or ETF, make sure you research and verify relevant information to determine which option is best suited for you.

Different Types of Mutual Funds and ETFs  🔍

Mutual funds and ETFs fall into several main categories. Some are bond funds (also called fixed-income funds), and some are stock funds (also called equity funds). Let’s understand them.

Bond Funds

Bond funds invest primarily in bonds or other types of debt securities. They generally have higher risks than money market funds, largely because they typically pursue strategies aimed at producing higher yields. Unlike money market funds, in the US the SEC’s rules do not restrict bond funds to high-quality or short-term investments. Because there are many different types of bonds, bond funds can vary dramatically in their risks and rewards.

Stock Funds

Stock funds invest primarily in stocks, which are also known as equities. Although a stock fund’s value can rise and fall quickly (and dramatically) over the short term, historically, stocks have performed better over the long term than other types of investments,  including corporate bonds, government bonds, and treasury securities.

Balanced Funds

Balanced funds invest in stocks and bonds and sometimes money market instruments in an attempt to reduce risk but still provide capital appreciation and income. They are also known as asset allocation funds and typically hold a relatively fixed allocation of the categories of portfolio instruments. But the allocation will differ from a balanced fund to a balanced fund. These funds are designed to reduce risk by diversifying among investment categories, but they still share the same risks that are associated with the underlying types of instruments

Alternative Funds

Alternative funds are funds that invest in alternative investments such as non-traditional asset classes (e.g., global real estate or currencies) and illiquid assets (e.g., private debt) and/or employ non-traditional trading strategies (e.g., selling short). They are sometimes called “hedge funds for the masses” because they are a way to get hedge fund-like exposure in a registered fund. These funds generally seek to produce positive returns that are not closely correlated to traditional investments or benchmarks.

📌 Many investors may see alternative funds as a way to diversify their portfolios while retaining liquidity. The risks associated with these investments vary depending on the assets and trading strategies employed. These funds can employ complicated investment strategies, and their fees and expenses are commonly higher than traditionally managed funds. Also, these types of funds generally have limited performance histories, and it is unclear how they will perform in periods of market stress.

Smart-Beta Funds

These funds are index funds with a difference. They compose their index by ranking stock using preset factors relating to risk and return, such as growth or value, and not simply by market capitalization as most traditional index funds do. They aim to achieve better returns than traditional index funds, but at a lower cost than active funds. These funds can be more complicated and have higher expenses than traditional index funds, and the factors are sometimes based on hypothetical, backward-looking returns. These types of funds generally have limited performance histories, and it is unclear how they will perform in periods of market stress.

Esoteric ETFs

Esoteric or exotic funds are ETFs that focus on niche investments or narrowly focused strategies. They may be complicated investments and may have higher expenses. Plus, these ETFs are often thinly traded, which means they can be harder to sell and may have larger bid-ask spreads than ETFs that aren’t as thinly traded.

Money Market Funds

Money market funds are a type of mutual fund that has relatively low risks compared to other mutual funds and ETFs. By law, they can invest in only certain high-quality, short-term investments issued by the U.S. Government, U.S. corporations, and state and local governments. Government and retail money market funds try to keep their NAV at a stable $1.00 per share, but the NAV may fall below $1.00 if the fund’s investments perform poorly. Investor losses have been rare, but they are possible.

Alternatives to ETFs and Mutual Funds 😉

Fortunately, artificial intelligence (AI) arrived in the financial market and it can help you diversify your investments beyond ETFs and Mutual Funds. You can invest in the forex market with automated AI trading, which is replacing the robot traders.

💡📌 A fundamental feature of automated AI trading, compared to simple Robo advisors, is the ability to learn which are the best and worst decisions to be made for a given task and data set.

Wiseinvest’s AI investment solution is the result of years of research and development by specialists in Artificial Intelligence, Finance, and Mathematics, who combined their skills specifically to design the best tools for helping traders invest automated or manually with AI forex signals in the forex market, regardless the experience level.

Why you should consider investing in forex with Wiseinvest’s AI trading ✅

  • Portfolio diversification in forex.
  • 3 times the average returns of S&P500*.
  • You can try our AI for free and with practice accounts.
  • It is efficient and totally hands-free.
  • Invest from anywhere in the world, from just $1.
  • Very simple and quick setup.
  • It is safe and affordable.
  • Integrated with the best brokers.
  • There are no management and performance fees.
  • There is a team of specialists to support you.
  • Learn finance with real leading experts.

Our average annual return over the past 10 years (2011 – 2020) was +43%. You can check our real-time track record by clicking here.

How to invest with AI 💹

Are you looking to invest and diversify beyond mutual funds and ETFs through Robo-advisors? Use AI to invest. There are two ways to invest with our AI in forex:

1. Automated with AI trading. Check out the 3 steps to trade automated with our AI.

automated trading with ai bot

By trading forex automated with AI, you will save time and improve your performance without monitoring the market and managing trading platforms.

With Automated AI trading you do not need MT4 / MT5 and other trading platforms to invest in forex. All forex trades are automatically placed into your broker account every time that our AI system identifies a new worthy trading opportunity. You can monitor the AI trading performance in real-time directly on our dashboard.

Automated AI trading benefits 🏆

  • Setup in 3 minutes.
  • Totally hands-off, from anywhere.
  • Invest from just $1.
  • APY of 43% over the past 10 years*.
  • Capital protected under the brokers
  • Lightning-fast execution & no slippage.
  • No commissions, no management fees.
  • Portfolio with 40 different automatic strategies.
  • No MT4/MT5 or other platforms required.
  • Test with a risk-free practice account.
  • Trading results directly on our dashboard.

Don’t you have a broker account yet? Our AI is integrated to trade automated with the brokers Oanda and FXCM. Click here to open an account with FXCM or here to open with Oanda. Those are some of the best forex brokers in the world.

2. Manually with AI forex signals.

Wiseinvest also provides AI forex signals that perfectly fit into MT4MT5, and any trading platform. To trade with our AI forex signals, you must simply copy the data you receive from each real-time signal into any forex brokerage account of your choice.

There are five unique variables for each AI signal, and each must be copied exactly, to match the performance of the signal as close as possible.

Each AI forex signal alert consists of the following five data points:

  • Symbol (forex pair)
  • Direction (long or short)
  • Position size (number of units or lots)
  • Take profit (price level to exit with maximum gain)
  • Stop loss (price level to exit with maximum loss)

Check out how to trade with our AI forex signals.

  1. Subscribe to a Wise-Plan.
  2. Open a Brokerage account. Check this article about the best forex Brokers.
  3. Set an amount and a position size on our Wiseinvest dashboard.
  4. Our AI will send you real-time trading alerts by email and Telegram.
  5. Copy the signals and paste into your Brokerage account.

All forex signals are sent every time that our AI trading system identifies a new trading opportunity. Our trading strategies are developed on a variety of time frames such as 4 and 8 hours.

Wiseinvest AI forex signals are Market Orders and you do not need the entry price. You can copy each signal while it is available on our dashboard. We do this way to assure that traders will just place signals while they are good to be traded.

You can trade forex with our free forex signals clicking here, or with our Premium subscription that provides you unlimited AI signals and automated AI trading in partner brokers. Whether you are a beginner or a professional forex trader, our AI trading system can help you save time and improve your trading performance. Get started with free AI.

When investing through Wiseinvest automated AI trading or AI forex signals, you do not need to calculate pips and change the leverage in your forex broker account. Learn more about leverage in forex trading by clicking here.

What happens after linking a forex broker account with AI trading

  • The AI will automatically invest on average every 12 hours in your account.
  • There will be up to 60 trades per month (Monday – Friday).
  • You can enable and disable AI whenever you want.
  • Check your trades on our dashboard or the brokerage.
  • You can link more than one broker at the same time.
  • You don’t need MT4 / MT5. It’s all on our dashboard.
  • Your capital is protected under the broker.
  • Your personal data is protected by us.

📌 Would you like to try our automated AI trading for free in a risk-free demo account? Get started free here.

Eliminate constant market monitoring and emotions in trading

Our automated AI trading system monitors and take decisions and executes trades based on market movements. So, the need to continuously monitor the market manually during trading hours is not required. Also, when using AI to trade forex, you will put aside any trading mistakes caused by emotional interference. It turns out that forex trading is an activity that requires impartiality and cold emotions, and most people lose money on Forex due to anxiety and impatience. With AI trading, you won’t have that kind of concern.

How much do I need to trade forex with AI?

You can start in forex trading with free AI forex signals or AI trading from just $1 through some of the best forex brokers. It is moreover possible to test using a risk-free demo account with our AI trading structure. Regardless, to do a capable peril, the board in authentic records, we suggest you start from at least $100.

What is the best forex broker to use AI trading?

To define which forex broker you should choose for using our automated AI trading, it is important to consider the following aspects.
  • Where are you from? For example, Oanda accepts US accounts, but FXCM does not. On the other hand, FXCM accepts accounts from some countries where Oanda does not.
  • How much do you have? With Oanda, you can start at $1, and FXCM is ideal if you start from at least $300.
  • FXCM sometimes provides higher liquidity volume and lower spreads than Oanda, which are vital aspects of the success in forex trading. But it can also vary.
We are confident that Oanda and FXCM are among the top 5 best forex brokers in the world and our AI trading works perfectly through any of them. Then, we suggest you take your final decision taking into account where you are and how much you have.
If you are considering trading with our manual AI forex signals, we would also like to suggest XTB, which is one of the best forex brokers in Europe.

Why trust Wiseinvest instead of other trading solutions

These are the main reasons why forex traders at all levels trust us, rather than other trading solutions.

  • Our automated AI trading is efficient, simple, safe, and affordable. You do not need MT4 or other complicated platforms to trade forex.
  • We are a legitimate and reliable company with extensive experience in finance. We combine 19 years of trading experience and extensive academic research in the financial markets.
  • Our AI outperformed the investment market with an average annual return of 43% over the past 10 years (2011-2020).
  • The automated AI trading works with some of the best forex brokers.
  • When using our AI solutions, all your money is protected by brokerage firms.
  • We do not have access to withdrawals from our customers’ accounts.
  • All of your data is encrypted and will never be shared.

Key Points to Remember

■ Mutual funds, ETFs, and Forex are not guaranteed or insured by the FDIC or any other government agency, even if you buy through a bank and the fund carries the bank’s name.

■ Past performance is not a reliable indicator of future performance, so don’t be dazzled by last year’s high returns. But past performance can help you assess a fund’s volatility over time.

■ All mutual funds, ETFs, and forex brokers have costs that lower your investment returns. Shop around and compare fees

Takeaways

  • Mutual funds and ETFs have several features that appeal to a wide variety of investors, from professionals with large amounts to tech-savvy millennials and small retail investors.
  • Many investors may see alternative funds as a way to diversify their portfolios while retaining liquidity. The risks associated with these investments vary depending on the assets and trading strategies employed.
  • Artificial Intelligence has gained traction among traders and it is now the new generation of systems to invest in.
  • Due to its ability to evaluate scenarios, learn quickly, adapt and make the right decisions or give accurate suggestions for decision making, AI can be a very powerful predictive tool in forex trading, if implemented correctly.
  • Wiseinvest provides helpful AI trading solutions to invest in forex. You can trade automated through the best forex brokers with AI trading or manually with AI forex signals in the forex broker of your choice.
  • You can get started with free AI forex signals and use a risk-free practice account.
🤝 We are engaged in democratizing the retail forex trading market through AI solutions. We work hard to provide financial education, allow anyone in the world to invest easily with Automated AI trading and free AI forex signals. Our AI platform is integrated with AWS, IBM Watson, and Google AI.

Disclaimer: Forex and Contracts for Difference (CFDs) are complex instruments and come with a high risk of losing money due to leverage. Forex trading is not suitable for everyone. You should consider whether you understand how forex and CFDs work and whether you can afford to take the high risk of losing your money.

The forex brokerages displayed shall disclaim the overall performance of traders in their platforms. Oanda warns that 76.8% of retail forex traders lose money trading CFDs. XTB warns that 80% of retail forex traders lose money trading CFDs. FXCM warns that 74.74% of retail forex traders lose money trading CFDs.

ETNs are complex, involve many risks for interested investors, and can result in the loss of the entire investment.

The performances aforementioned are not related to Wiseinvest AI forex trading and AI forex signals system. You can check the performance of our AI forex system on our dashboard.