If you’re new to investing, the sheer number of investment vehicles available can be overwhelming. You could try stocks and bonds, but it’s tricky to navigate the complex investment landscape – while also understanding enough about the markets and economy – to know when to buy and sell.

Many investors (both new and experienced) opt for investment funds such as mutual funds or exchange-traded funds (ETFs). While we won’t go into much detail here, you’ll get a brief overview of both product types. An Alterna Advisor can give you more insight and guidance regarding investment funds.

Instant diversification

It’s generally wise to invest in a range of securities. This strategy is known as diversification and key benefits include the potential to enhance long-term performance while helping to manage risk. However, most individuals don’t have the ability to identify and track a large number of securities, nor could they afford to buy them all. That’s where products like mutual funds and ETFs shine. They can invest in many securities by pooling together the money that people invest in them. Each investor has part ownership of the assets held in a particular fund, so they can enjoy benefits like strong diversification.

Professional management

Another positive feature of investment funds is that the hard work is done for you. Accredited professionals from regulated money management firms undertake such tasks as scouring their investment universe for potential mutual fund holdings – and then conducting in-depth research and analysis of individual securities, macroeconomics and market conditions – in order to build and oversee a well-diversified portfolio that can meet the fund’s investment objectives and risk tolerance.

Convenience

Mutual funds and ETFs come in many varieties to satisfy an investor’s particular needs. Common types include those that invest in: a particular region; relatively stable industries like banking and utilities; growth-oriented industries like health care and technology; commodities like gold and oil and gas; dividend payers; different kinds of bonds; alternative investments and more. A “balanced” fund tends to invest in stocks and bonds of different companies or issuers, offering broad diversification. Whatever fund type you choose, you can leave the monitoring and decision making to the experts.

Fees

Of course, the benefits of investment funds come at a cost. Investors pay fees to the fund managers for overseeing and operating the funds. In general, mutual fund fees are higher than ETF fees, since most mutual funds are actively managed by professional managers who need to be compensated for their time and expertise. Some ETFs employ varying degrees of active management following a set methodology, but many are “passive” investments that aim to track the performance of a particular benchmark index, which is why their management fees tend to be much lower than mutual funds.

You can buy investment funds in different ways. Mutual funds are often traded through an advisor who works at a licenced dealer, but they may also be available from a discount broker (for DIY investors) or sometimes from the fund management company. There may be fees to buy a fund, typically based on a percentage of the assets you invest. Since ETFs are listed on an exchange (just like trading stocks), you may need to pay a commission when buying and selling – depending on the type of account you hold.

The choices are yours

Whether you own mutual funds or ETFs (or both) is a decision to make based on your personal circumstances and financial goals, while your investment time horizon and risk tolerance will also factor into which type of funds you select. Mutual funds and ETFs can both be effective building blocks for an investment portfolio that can help grow your long-term wealth, so it could be worthwhile to look into them further and consult with your Alterna Advisor (if you work with one).