Most of us spend lots of time in deciding which investment would suit our financial needs the most. The type of investment to be made and the way in which it can be used in one’s portfolio are questions that need appropriate answers for which again; a lot of time has to be invested. You need to make the right decision so that you do not lose out on your investment which could be the most valued investment in your portfolio. Some of the questions which normally a prospective investor would want help with are provided in the following paragraphs.
Almost all the investors need help with how to effectively channelize their money for profitable returns. Few issues which form the crux of making an investment are as follows.
What to Invest in- ETF or Mutual Funds?
While investing you will need to consider facets including legal structure, tax treatments and cost involved. To decide whether to invest in ETF or Mutual Funds, you will need to evaluate the following three factors.
Driving Force behind the Investment:
The first and foremost thing which you need to understand is the reason for making the investment. Will be a “market play” for you or are you thinking of something on long-term basis which you do not intend to trade out? Or will be short-term based which you just want to get ‘in’ and ‘out’ of? Are planning on “temporary allocation” with which you can make adjustment within a year or so?
Your decision will depend on the way you answer these questions. In case, you still have not made up answers for these questions, it is better to find them out before you continue with the discussion.
How to Purchase the Investment?
This is one other important question. Have you decided to pour in a large amount at a time in the investment or are you planning on a monthly investment.
Moreover, will you be able to make reinvestment on the dividends or is it that you are looking only for cash in return? Most of the investors use this strategy of reinvesting on the dividends. Once you are clear on your mind as to what you want to do with the money and how will you actually make the investment, the decision will be more visible to you.
You will need to think about the “liquidity” issue. For those areas that are “thinly traded” such as “individual country” investment, you will have more liquidity in mutual funds than in ETFs. An ETF needs to be traded just the way stocks are, which is why you would require a buyer; something that is far from occurring when the market is not up. On the contrary, mutual fund will help you provide you the facility of “cash-on-hand” for purchasing your shares.
You need to calculate all the possibilities before the cost causes more damage than necessary. In both the options for investment, the cost is distributed in two types of fees-the management fees and the transaction fees. By analyzing the above two aspects and deciding on the purpose as well as way of purchasing the investment, you can easily estimate the cost involve in both the investment types.
However, “mutual fund loads” and reinvesting dividends needs to be calculated separately. These aspects will be additional monetary burdens if you are compelled to pay for dividend reinvestment or are hit by “sales fee”. One point to remember is that each brokerage company charges separate amount for reinvestment fee. Therefore, you will need to ask accordingly.
To conclude, you can rebalance your portfolio by making use of the dividends from ETF products. You can thus avert the issue of “automatic transaction fees”. Balancing the portfolio demands both buying and selling which helps in transaction of two fees. Nevertheless, by using dividends for changing your allocations you can simply make payments for the purchase that you make while averting the “sales fees”.
Summary: Making an investment is a decision which requires precaution and thorough research. Some of the considerations which you will need to make while investing in mutual funds or ETFs are elaborated in the writing.
SB is a skilled guest blogger. She writes articles on varieties of topics but his main interest on finance and investment related topics like Pacific Tycoon.