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[00:00] index funds, mutual funds, hedge funds, or ETFs? I'm sure you've heard about this before. In this video, I'm going to explain these types of investments in a super simple and practical way.

[00:16] We'll start with what a fund actually is, then go over the different kinds, how they're managed, the risks involved, the fees you might pay, the strategies they use, and most importantly, who they're really meant for.

[00:32] So please, give me 10 minutes and I'll give you the knowledge most people take years to figure out. But first of all, I would like to make clear that this is not any kind of financial advice.

[00:46] Alright, before diving into every kind of fund, first let's understand what a fund actually is. Imagine you and your friends are organizing a birthday party. Instead of one person buying everything, each of you puts in a little money.

[01:01] With that pooled budget, you can get food, drinks, decorations, cake, and even music. No single person has to worry about covering everything, and everyone gets to enjoy the full experience without the stress of managing it all alone.

[01:17] That's exactly how a fund works. A group of people pool their money together, and that money is used to invest in a variety of assets like stocks, real estate, or bonds.

[01:29] Instead of trying to manage each investment yourself, the fund handles it for you, and you get to share in the overall results. Now that you've got a clear idea of what a fund is, let's dive into the different types,

[01:44] starting with index funds, which are probably the most talked about on social media. You've likely heard influencers or finance creators say things like, just throw your money into an index fund and forget about it.

[01:58] But what does that actually mean? All right, an index fund is a type of fund that doesn't try to pick winning stocks. Instead, it simply copies a list or index of companies.

[02:12] But what exactly is an index? Think of it like a scoreboard or a sample group. It's a list created to represent a certain part of the market. For example, the S&P 500 is an index that tracks 500 of the biggest, most established companies in the United States.

[02:31] The bigger the company is, the more weight it has on the index. If the S&P 500 goes up, it usually means the market as a whole is doing well. There are all kinds of indexes out there.

[02:44] Some indexes track tech companies in the U.S., like the famous NASDAQ. This index includes giants like Apple Microsoft and Amazon and it seen strong growth over the past decade thanks to the rapid rise of technology Then there are industrial indexes like the Dow Jones Industrial Average

[03:07] or just the Dow. This one tracks 30 large well-established companies across different industries. Think Coca-Cola, Boeing, and Johnson & Johnson. There are also indexes for small

[03:19] companies, international markets, emerging economies, and even specific sectors like energy or healthcare. I think you got the idea. No picking, no guessing. Index funds are passively

[03:33] managed, which means there's no one actively choosing what to buy or sell. They just follow the index. And that's actually a good thing, because it keeps the fees super low. You're not

[03:46] paying for a manager, just a system. Most index funds charge an annual fee, called an expense ratio, of anywhere from 0.02% to 0.20%. That means if you invest $1,000, you might pay just

[04:02] $0.20 to $2 per year in fees. Incredibly right? Some of the most well-known companies that manage index funds are Vanguard, BlackRock, which runs the iShares funds, and Fidelity. Index funds are

[04:17] also known for being low risk, relatively speaking, because your money is spread across hundreds of companies. If one company has a bad year, it probably won't tank your whole investment,

[04:29] depending on the fund, of course. Before we move on, there's something really important to understand about how index funds work, especially when it comes to buying and selling them.

[04:42] Unlike stocks or ETFs, you can't buy an index fund at any time of the day and lock in the current price. Instead, index funds are only priced once per day after the market closes. That price is

[04:56] called the net asset value. It's calculated by taking the total value of all the assets in the fund minus expenses divided by the number of shares the fund has. So, if you place an order

[05:09] to buy or sell an index fund at 11 a.m., your trade won't go through at that moment. It will be processed at the net asset value calculated after the market closes, typically at 4 p.m.

[05:21] This is what's known as the cutoff time. If you place your order before the cutoff, Your trade will be executed on that day. This can vary depending on the fund management company you're using.

[05:35] Some may take a few days to process and execute your order. This system makes index funds simple and consistent, but it also means you don't have real-time control over the exact price you'll get.

[05:48] For most long investors that totally fine but it something to be aware of so you not surprised when the trade doesn go through right away So why are index funds so popular

[06:01] Simple. They're low cost, low effort, and historically, they perform pretty well over the long term. That's why a lot of experts, even Warren Buffett, recommend them for most investors,

[06:14] because it's extremely difficult to consistently outperform the market. All right, now let's talk about mutual funds. At first glance, they might seem similar to index funds. They both pool money from many investors and spread it across a bunch of assets.

[06:30] But the big difference is in how they're managed. Mutual funds are usually actively managed. That means there's a professional fund manager or even a whole team actively deciding which stocks or bonds to buy and sell, trying to beat the market.

[06:45] The goal is to outperform a benchmark, like the S&P 500, by picking the right investments at the right time. Now, that might sound great in theory, but here's the catch.

[06:57] Active management usually comes with higher fees. Mutual fund expense ratios often range from 0.5% to 1.5%, and sometimes even higher. And studies have shown that most actively managed funds don't consistently beat the market.

[07:15] Still, some people prefer mutual funds because they believe in the fund manager's strategy, or they want exposure to specific sectors, countries, or asset types that may not be available through index funds.

[07:29] It is also a way of diversification. Some of the biggest mutual fund providers include Vanguard, Fidelity, and J.P. Morgan. These offer a wide range of funds, some of which are actively managed and others passively managed,

[07:44] so it's important to check what kind of fund you're investing in. Moreover, just like with traditional index funds, mutual funds also execute trades at the end of the day. You can place your buy or sell order at any time,

[07:58] but it will only be processed after the market closes. Let's move into hedge funds, which are a completely different kind of investment compared to index funds, mutual funds, or ETFs.

[08:10] The name hedge comes from the idea of hedging risk, But in reality, hedge funds are more about chasing higher returns, and they do it using more aggressive and complex strategies.

[08:22] So what exactly is a hedge fund? It's a private investment fund that pools money from wealthy individuals or institutions and invests it in a wide range of assets, stocks, bonds, real estate, currencies, derivatives, etc.

[08:38] But unlike mutual funds or index funds hedge funds often use strategies like short leverage which is borrowing money to invest more and derivatives to try to generate high returns They actively managed by fund managers who often have a lot of freedom to make bold investment moves

[08:59] This can lead to huge profits, but also huge losses. That's why hedge funds are usually only open to accredited investors, people with a high net worth or income, because the risks can be much greater.

[09:13] And the fees? Hedge funds are known for the famous 2-in-20 model, A 2% annual management fee, plus 20% of any profits the fund makes. That's a lot more than index or mutual funds charge.

[09:26] So to make it worthwhile, hedge funds aim for much higher returns. But that also comes with higher volatility. Finally, let's talk about ETFs, or exchange-traded funds.

[09:39] These are often seen as a hybrid between index funds and individual stocks, because, just like a stock, they trade throughout the day on the stock exchange. But, like index funds, they provide diversification by pooling investments in many different assets.

[09:57] ETFs are bought and sold throughout the day, just like stocks. That means you can track their price in real time and decide when to buy or sell based on market conditions, making them more flexible. ETFs also have low fees, typically lower than actively managed mutual funds.

[10:15] Their expense ratios usually range from 0.03% to 0.75%, depending on the type of ETF in management. And because they're passively managed in most cases, they follow an index,

[10:31] meaning they're designed to track the performance of a particular sector, industry, or market as a whole. That means that if you want to invest in the S&P 500, you are able to do it using an index fund or an ETF that replicates this index.

[10:48] Plus, many ETFs can be bought on brokerage platforms with no commission fees, making them very accessible. In conclusion, for most everyday investors, index funds or ETFs are usually the best choice.

[11:02] They're low cost, easy to understand, and offer broad diversification perfect for long-term investment. Mutual funds may be suitable if you believe in a specific fund manager's strategy

[11:14] or want exposure to certain sectors, but keep in mind the higher fees and uncertain performance. Hedge funds are designed for high net worth individuals who are willing to take on more risk

[11:26] and pay higher fees for potentially higher returns. They're not typically for the average investor. That's everything I wanted to make clear. I hope you understand every kind of asset.

[11:38] If you did, I would really appreciate it if you liked the video and subscribed. I will leave this video here, which you will probably like as well. Thanks for watching and see you very soon.