So, you are interested in investing money in the stock market. Understandably, you are unsure whether to invest in ETFs or mutual funds. Understanding how both works will help you make an informed decision.
The choice between mutual funds and ETFs have become increasingly complex, especially in Denmark, where index funds dominate the market. This type of investment vehicle ensures that you get a return corresponding to the general development of the stock exchange or bond market it is invested into.
Still, as the performance is not affected by either upswings or downturns, returns are low compared to actively managed funds that seek to outperform the respective market.
Despite this, more and more investors prefer index-linked investments as they are less vulnerable than active investments over time. If this article were about choosing which kind of fund would give a better return for your money, the answer would most definitely be active.
Still, if you are looking for steady, safe returns over time, index funds will likely provide this better than actively managed funds.
What is an ETF?
An ETF is a tradable index fund share that can be sold on a stock exchange at any time during the day when the market is open. It means that it is an investment vehicle that tracks the price of certain assets, usually commodities, bonds, or stocks.
If someone holds 100 shares of an ETF, they own part of all the assets tracked by the ETF. Investors usually prefer to buy ETFs because it has low fees than buying actual pieces of assets. The low amount could also be considered an advantage since it might require less money to invest in ETFs. It is also believed that the fees on mutual funds are higher than on ETFs.
What is a mutual fund?
A mutual fund consists of a pool of funds collected from many investors. Financial experts will then invest the pooled money according to their standards. It can include stocks, bonds, or other assets, but not every asset class.
Usually, the return rate for investments made into this type of company can vary depending on your financial manager/advisor and what they choose to do with the money you give them. Mutual funds are only available during certain hours of the day, which inconvenience some investors.
What are the differences?
Regarding ETFs vs mutual funds in Denmark, no contest considers return on investment alone. When performing an easy comparison of the two types of investment vehicles, one will find that they are both cheap, risk-free investments with low fees compared to other countries in Europe.
For example, where regulation is not as strict, costs can be higher due to increased risk associated with less security.
The Danish market has come a long way regarding transparency in index-linked investments and has adopted global regulatory standards that favour consumers.
The difference between ETFs and mutual funds in Denmark comes down to how you wish to invest your money and your long-term plans for this investment, as index funds minimise the risk associated with market fluctuations. Still, they also have a less attractive return on investment, as shown above.
When it comes to ETFs vs mutual funds in Denmark, if your priority is to get as much as possible out of the investment, you should go for actively managed funds which may or may not provide a better return but will most definitely allow you to outperform the Danish stock exchange.
If, however, your priority is low risk with steady returns over time, index-linked investments will more than likely suit your needs.