How to pick the right investing strategy and make it big!!
- An investment product like a stock, a bond, an ETF, or a mutual fund gives you access to 1 or more asset classes.
- However one needs to consider cost, investment style, and convenience when choosing the right product.
- Your investment strategy should match your target asset mix.
Building your portfolio is like cooking a beautiful dish, your account is the dish itself. The flavours and toppings you want to include—sweet, savory, spicy, tangy, with proteins or carbs —are your target asset mix. The specific cooking style you choose? They’re your investments.
If you’ve already determined your target asset mix and account type, you’re ready to choose your investments. Here’s a quick look at 4 common investment products.
An investment product gives you access to a single asset class or a combination of asset classes. An individual stock or bond exposes you to a single asset class—stocks or bonds, respectively—while a single ETF or mutual fund can expose you to one or more asset classes.
- Individual stock
A stock is traded on a major exchange like the SENSEX, NIFTY, Nikkei, New York Stock Exchange or Nasdaq. When you own a stock, you essentially own part of a specific company, and you get some of its assets and profits.
- Individual bond
A bond is a loan. When you purchase a bond, you’re lending money to the bond issuer (e.g., a government, government agency, or corporation) in exchange for repayment plus interest by a specified date (maturity).
An index (i.e., a market benchmark) is a selection of stocks, bonds, or other securities that represents what’s going on in the overall market. For example, the Standard & Poor’s 500 Index represents 500 of the largest U.S. companies.
An ETF (exchange-traded fund) bundles together many stocks or bonds in a single investment and may track an index. When you own an ETF, you own a portion of its underlying portfolio. An ETF also trades on major exchanges.
- Mutual fund
A mutual fund, like an ETF, bundles together many stocks, bonds, or other securities in a single investment and may track an index. But there’s a notable difference in how you buy and sell ETFs versus mutual funds. ETFs trade on major stock exchanges directly from one investor to another, while mutual fund companies, banks, and brokerage firms buy and sell mutual funds.
So what should be considered while investing?
Cost matters and that’s a crucial truth that needs to be taken into consideration. The less money you spend, the more you keep. The cost of an investment depends primarily on its expense ratio and commission.
Expense ratio is the annual maintenance charge levied by mutual funds to finance its expenses. It includes annual operating costs, including management fees, allocation charges, advertising costs, etc. of the fund.
Value of an expense ratio depends upon the size of the mutual fund in question. A fund operating with a smaller pool of financial resources has to allocate a certain proportion towards optimal management. This thereby increases the relative value of the expenses concerning the total amount of funds available.
A commission is a fee you pay to a broker each time you buy or sell 1 or more shares of an individual stock, bond, or ETF. For example, if you buy shares of 20 individual stocks, you’ll be subject to 20 commission charges. If each commission is $5, that’s $100 (regardless of the total amount you invest).
Similar to an expense ratio, when you pay less in commissions, you have more money available to compound.
Which products may have an expense ratio?
- Mutual funds.
Which products may have a commission?
- Individual stocks.
- Individual bonds.
2. Investment style
An investment style describes a technique used to pursue a goal. Some investment products, including mutual funds and ETFs, can be active or passive.
Actively managed funds seek to outperform the market and generate above-average returns. An active fund’s portfolio management team relies on research, market forecasting, and personal experience to decide which bonds and stocks they’re going to buy.
Although actively managed funds attempt to beat the market, they may underperform the market. Mutual funds offer the biggest selection of actively managed funds, but some ETFs are actively managed too.
A passively managed fund—known as an index fund—holds all (or a sample) of the bonds or stocks in the index it tracks. The fund then mirrors the index and only buys or sells when the index makes a significant change.
Most ETFs are passively managed, whereas mutual funds can be either passively or actively managed.
If you’re like most investors, the amount of time and effort you want to spend building a diversified portfolio may be the most important factor in choosing an investment product.
Answer the questions below and follow the lines to determine which product may be the best option to meet your needs.
You’re investing now!
Once you’ve chosen an investment product, select a specific investment with an objective that matches your own.
Whether you chose a single investment or several investments to hold in your portfolio, the total percentage of stocks, bonds, and cash you own should match your target asset allocation.
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