“ONE one cocoa f ull basket!” Most investment houses now offer a wide array of investment options to the public. This may, at times, be intimidating as interested persons are afraid to ask what exactly does that term mean and how can that help to achieve my financial goals.

One of the most commonly used terms available to investors is “funds” or “mutual funds”. Financial institutions will, with the assistance of fund managers, combine clients’ money to invest in a wide array of assets which may include stocks, bonds, and even real estate. The fund manager will, depending on the needs of the client, invest in a mixture of asset classes that will offer the best return possible for them.

These options are regulated and monitored to ensure the clients’ investments comply with the governing bodies. They are also traded daily; that is, sold or purchased through the institution where the monies were invested.

The mutual funds may be of two types: Open-End Fund and Closed-End Funds. Open-end funds offer shares and returns based on how the fund performs. The more the demand for the fund, the more shares the company will offer. The fund will be valued daily and based on this valuation, the price per unit will be set for the fund shares. Closed-end funds, on the other hand, have a specified amount of shares that are issued and the price per share is also driven by the demand from the clients. The prices for either of these funds are set at the end of the day based on the value of the combined assets which make up the pool. An example of mutual funds are CI Investments. These are Canadian-based investments which are keenly watched by the advisors who then give recommendations for sale or purchase to ensure the clients make the most returns from the monies invested.

An Exchange-Traded Fund (ETF) offers clients the opportunity to buy shares in a group of similar products and will match the performance and price of these products on the stock exchange. ETFs are similar to funds except that they trade on an exchange or stock market, like a stock. Instead of purchasing an actual gold bar and having to pay for storage, insurance and the many fees attached to holding a product of such value, clients are able to purchase the ETF in gold such as SPDR Gold Trust. This will give them the shares in a combined asset based on the gold deposits and distribution. The price of the ETF will move in the same manner of the actual product but offers a variety of products instead of investing in a single stock or commodity.

Funds and ETFs are similar in how they operate but they offer differences which set them apart for the individual investor. The prices for funds are set on the close of the previous business day. This is determined by the value placed on the assets in the pool. The price of ETFs changes based on the demand for the shares on the market and the performance of the various products that make up the pool. They both offer shares to the investor; however, the fees attached to each option will differ significantly. The fund will incur fees which are attached at the time of investing and if needed, may also have higher fees to encash. ETFs, like shares, will have trading fees or commission at the time of purchase or sale, but these may be substantially cheaper in comparison to the funds. Tax issues will also differ for the funds versus the ETF. The fund may make a capital gain and this will be passed on to the investor at the point of encashment. Taxes are charged on the capital gains. The ETF, on the other hand, will trade on the market between buyers and sellers, so the likelihood of capital gain will not be as evident. There will be a minimum, to be set by the financial institution, for investment in funds. When purchasing ETFs, clients are able to buy as little as one unit. However, the trade fees associated with ETFs can become quite expensive over time as each fee adds up. Funds will process payment on the day that it sells or is bought but ETFs will be paid three days after being sold or paid for after being purchased.

Investment in mutual funds will need the assistance of a fund manager. This person has to be dedicated to watching the performance and value of the fund while providing continuous, guaranteed and valuable feedback to the investor. This will ensure the best returns for the amount of money invested. ETFs allow the investor to access information more readily and timely on their own by watching the performance of the products on the stock exchange and then judging for themselves when it is best to buy more or sell based on the amount of profit they wish to make. This way, they are able to set their boundaries and once the price is reached, then they can request the sale and move on. As demand increases or decreases daily on the exchange, the prices will move in the same manner which means ETFs are more price volatile. The fund is not as liquid so will not offer as much increase or decrease in price as ETFs.

Investors who do not have large amounts to invest but will be able to make additional injections of monies over a particular period will gravitate toward the ETFs for their portfolio. ETFs offer diversification on a wider scale and the option to purchase of sell on a smaller scale. Taxes incurred are less than that of other options and therefore offer a better investment for someone just starting out. In contrast, the funds investment offers greater opportunity to invest larger amounts and with less risk in terms of the price volatility. This option will be more valuable to someone who is interested in holding the value of the monies they invested for a longer period of time.

Both options are similar but still have distinct differences. Consult with your financial advisor about which option is better suited for your specific investment goals. Basket mek fi carry wata or cocoa? What kind of basket will you carry?

Jean-Ann Panton is a wealth advisor at Stocks & Securities Ltd. Contanct: jpanton@sslinvest.com