By Isaac Chanakira
In my previous article, The Six Investments Vehicles That Turns Me from a Poor Immigrant to A Millionaire, I mentioned that I use mutual funds as one of the investment vehicles in my portfolio. For the benefit of those who are interested in Mutual funds, I will explain in detail how you can get started. Point of warning though, when you invest, you are taking on some kind of risk with a chance of generating a return on investment
The value of your investments can fall as well as rise. This applies to most investment classes and not just mutual funds. A share that you buy today for $15 dollars could be worth less than $15 tomorrow or at any time in the future. The idea is to invest for a longer period to give the market time to fluctuate, and, judging from history, your investments are more likely to rise in value. Even with a long time in the market, there are no guarantees that your portfolio will rise in value. A black swan event such as Covid 19 can wipe out all your gains within a short period, so it is a good idea to keep your goals and risk appetite in mind when you build your portfolio.
Please note that I don’t intend to scare you from investing, but you need to have all the facts beforehand. Failing to invest is a much bigger risk because, like I pointed out on my other article, How Your Saving Beliefs Are Stopping You From Building Wealth, you will never be wealth merely by saving money. If you haven’t read it, do yourself a favour and go through the article. The rate of growth on your saved money will be very small so much that you will not be able to fund your goals or support yourself during old age. Just being alive is a risk, you can catch Covid 19 and die or you can be hit by a car on your way to the shops. So, do not be so scared and learn to take some calculated risks to grow your wealth. Using a diverse range of investments is one of the best ways to reduce your risk. That is the reason why I invest in different asset classes.
It is important to have some sort of investment goals or plans to give yourself the best chance of achieving your goals. Remember the time you were planning to migrate? You knew exactly which country you were herding too and which planes to take. You must use that acquired skill to plan your investments too. If you haven’t planned your migration and just leave your country, you will end up anywhere on the globe, probably in a country that you never heard of before. Having an investment plan will help you avoid numerous sleepless nights after watching the daily financial news. You will not panic when they talk of the market collapsing soon. No matter what they say on the news, stick to your investment plan, investing is a long-term game, and it is difficult to try and time the market.
Now that we all know what is at stack, let us talk about investing in Mutual Funds. As I have already described in my previous article, The Six Investments Vehicles That Turns Me from a Poor Immigrant to A Millionaire, mutual funds are companies or investment groups that will pool funds from different investors to purchase stocks, bonds, index funds. ETFs and other assets. You will be allocated with a number of units depending on the amount of money that you have contributed to the pool. In this article am going to concentrate on Index funds and ETFs because those are the two mutual funds that I invest in
Index Funds
Are a group of stocks designed to track the performance of a particular index, for example, the S&P 500 which is made up of the top 500 company stocks in the American market or the ASX 200 which is made up of the top 200 company stocks in Australia. So, if you invest in the S&P 500 index, you will be exposed to the top 500 companies in the USA. Similarly, if you invest in the ASX 200 index, you will be exposed to the top 200 companies in Australia.
There are two types of mutual funds, i.e., Index funds which are passive investments with the aim of equalling the market returns and actively managed mutual funds which uses a manager to actively select, buy and sell stocks in the fund with the aim of beating the market returns. When you buy into an index no active selection of stocks is needed since you will be buying all the stocks in that index, therefore, no active manager is required. The passive nature of the index investing makes it cheaper than the actively managed cousins. If you buy an actively managed fund, you will pay more in fees than investing in index funds. Having an active manager does not give that fund an upper hand, in fact, it has been proved in the past that most managed funds perform poorly compared to passive index funds. To make the most of your investments, you are better off buying passive investments instead of actively managed funds.
Exchange Traded Fund (ETF)
This is a fund that holds stocks, bonds and other securities, just like an index fund. A lot of investors get confused with the two funds and do not know the difference between them making it difficult to know which one to invest in. The funds do the same thing, but there are some minor differences between then that I am going to explain so that you will know which one to pick.
The main difference between ETFs and index funds is that ETFs can be traded throughout the day like stocks, its price will fluctuate throughout the trading day, whereas Index Funds can be bought and sold only for the price set at the end of the trading day. You can trade ETFs the same way you trade individual stocks but, unlike stocks, investors can still reap the benefits of diversification. Another difference between the two is that most trading exchange companies will not allow investors to buy fractional share, i.e., less than one full share. If the ETF is valued at $120 per unit you cannot pay $60 to get part of it. You will need to pay the full $120 or multiples of $120. With index funds you can top up with any amount after you invest the minimum requirement. Few companies such as Fidelity can allow fractional shares for both ETFs and index funds, so, you can look around to find out which companies offer what you want. Usually, there is a minimum investment requirement on index funds but none on ETFs so, if you are short of the minimum requirement, you can buy the equivalent ETF. Each Index fund have an equivalent ETF, therefore, if you want to start, the minimum requirement is not an obstacle.
How To Invest
There are lots of brokerage companies all over the world that can let you trade in ETFs and Index Funds. All you need to do is to visit the website of the company that you want to invest with. Open a trading account with them, set your password, deposit some money in your account and you are ready to go. Below are some of the best companies that offers a wide range of ETFs and Index Funds. Chose the one that is accessible to you in your host country and start your investing. I use Vanguard Group
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Charles Schwab.
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Fidelity Investments.
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TD Ameritrade.
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Vanguard Group.
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E-Trade Financial.
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Merrill Edge.
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Ally Invest.
Decide What to Invest In
When your account is up and running, you will be overwhelmed with the number of ETFs and Index Funds that are available for you to invest in. The index funds can be divided by company size such as small, mid and large cap. They can also be divided by business type such as Industrial, Tech etc or by Location such as US or Emerging markets or by currencies such as Treasuries, Bonds etc. Chose the Index Fund or ETF that you want to invest in and read the Product Disclosure Statements (PDS) and offer documents which will explain the fund product in detail, including investment objectives, structure, benefits, risks, cost and fees. In the USA, the cost and fees are listed as expense ratios.
For each product that you want to invest in, consider the following:
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Investment minimums:
What is the minimum investment amount for your first purchase, often several thousand dollars if it’s an Index Fund? In contrast, many ETFs have no such rule, and your broker may even allow you to buy fractional shares with just a few dollars. Most of the Index Funds at Vanguard have a minimum requirement amount of $3000 and then you can top up regularly any amount over $100. It is easier to setup any automatic regular top up with Index Funds once you pay the initial minimum requirement.
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Expenses:
Compare the expenses of each fund you’re considering. Sometimes a fund based on a similar index can charge 20 times as much as another depending on the investment firm that you select. It is a good idea to compare different companies before you start
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Performance History:
Check the long-term performance of the Index Fund, at least five to ten years to see what your potential future returns might be. Remember, the long term-performance is just your best gauge to what you might expect in the future, but it’s no guarantee, either.
Some of The Index Funds and ETFs That Are Common
Please note that I am not recommending any of these Index Funds or ETFs to you. You need to do your own research and decide on which ones you need to invest in. The whole idea here is to show you that per every index fund, there is an equivalent EFT that you can also invest in if the minimum requirement is beyond your reach. All the Vanguard Index Funds and ETFs will start with a V, the Charles Schwab will start with S and the Fidelity Investments will start with F.
On the table you will notice that some companies such as Fidelity or Charles Schwab do not have minimum investment amount, the reason is that they are trying to win over customers from Vanguard which is the original and the biggest of them all. In some countries, Fidelity and Charles Schwab firms are not available. It is not only the lower expense ratios or no minimum investment amounts that you must consider but a whole range of other things too e.g., the stability of the company, the historical returns etc. You can also invest on different firms. The choose is yours. I am not going to explain which stocks are in each Index Fund or ETF. You can easily find that information on Google by punching the Index name on the search tab.
| Index Fund | Minimum Amount Required | Expense Ratio | ETF Equivalent | Entry Amount | Expense Ratio |
| VHYAX | $3000 | 0.04% | VYM | Current ETF price | 0.06% |
| VFIAX | $3000 | 0.04% | VOO | Current ETF price | 0.03% |
| SWPPX | No Minimum | 0.02% | SWTSX | Current ETF price | 0.03% |
| FXIAX | No Minimum | 0.015% | FZILX | Current ETF price | 0% |
| FZROX | No Minimum | 0% | FNILX | Current ETF price | 0% |
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