Video courses › The instruments: how they work › Lesson 4

Mutual funds and ETFs

How a fund works, the difference between active and passive management, what an ETF is and which documents to read.

Video lesson in preparation (AI-generated presenter). Full text below.

Lesson text

An investment fund pools the money of many savers and invests it in a set of instruments: shares, bonds or others, according to a stated policy. Participants own units and share the results in proportion. The main advantage is that a modest sum gives access to a broad set of securities, which would be costly and complicated to build alone.

Funds differ in how they are managed. With active management, a manager picks securities with the aim of beating a benchmark index; this work is paid for with higher fees, and the aim is not necessarily achieved. With passive management, the fund simply tracks an index, for example the largest companies in a market: costs are generally lower and the result follows that of the index, up and down.

ETFs are funds, usually passively managed, whose units are bought and sold on an exchange like a share, during the trading day. They track an index and generally have low costs. Being easy to buy does not make them risk-free: an equity ETF falls when the market it tracks falls, and there are also complex ones, for instance leveraged, which are unsuitable for anyone who does not understand them thoroughly.

For every fund or ETF offered to the public in the European Union and the United Kingdom there is a short, standardised document with the key information: objectives, risk level on a scale, costs and performance scenarios. Reading it before any decision is the simplest way to compare different instruments on a like-for-like basis. The scenarios it contains are estimates, not promises.

In three points

• A fund pools the money of many and invests it in a broad set of securities.
• Active management tries to beat an index at higher cost; passive management tracks an index, generally at lower cost.
• An ETF trades on an exchange; it is easy to buy but carries the risks of the market it tracks. Read the key information document first.

Educational and informational content only. It is not personalised financial, investment or tax advice. All investments involve risks, including the possible loss of invested capital.

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