Question

List the pros and cons risk and advantages of index funds, mutual funds and ETF'S.

Answer 1

I) Pros or advantages, cons and risk of index funds, mutual funds & ETFs

a) Index funds :

Pros / Advantages:

Low cost - Associated costs with these funds are eliminated & hence costs are lower.

Diversification - It offers diversification & thus limits the risk.

Cons:

Returns - This funds are outperform index funds.

Downside risk - There is no guarantee that manager will be able to handle the fll effectively.

Risk :

Lack of flexibility - It is less flexible than non index funds to react to price decline in the securities in the index.

Tracking error - This may not perfectly track it's index.

Under performance - It may under perform because of it's fee, expense & trading costs.

b) Mutual funds :

Pros / Advantages :

Expert management - Mutual funds are managed by professionals.

Reinvestment of income - It allows to reinvest dividends & interest in additional funds shares.

Cons :

No control over portfolio - Mutual funds manager controls the portfolio.

Fees & expenses - Mutual funds require annual expenses than index funds.

Risk -

Market risks is the risk which may result in losses due to poor performance of market. It is known as systematic risk.

Interest rate risk is depends upon credit available with the lenders & demand from the borrowers.

c) ETF :

Pros :

Lower fees - Exchange traded funds (ETF) requires lower expense ratio than mutual funds.

Immediately reinvested dividends - Dividends in open ended ETF are reinvested immediately.

Cons :

Less diversification - There is less diversification opportunity in ETF.

Lower dividend yield - Yields may not be as high as owning high yielding stocks.

Risk -

Market risk - It is the biggest risk of ETF. Markets can go down or up.

Currency risk - If exchange traded investments underlying holdings are in currency which is different to denominated currency, investors will face currency risk.