Are Mutual Funds a Good Choice for Long-Term Investing? The Pros and Cons of Mutual Funds and ETFs

Hello, tuna(@miyakojimalife_) (^^)

Thanks in part to recommendations from YouTubers and bloggers, investing in stocks through index ETFs has become quite popular lately.

I get the impression that even people who have just started investing are buying Vanguard’s S&P 500 index fund.

One issue that often troubles people who have just started investing is

ETFWhat’s that?Mutual FundsI bet you’re wondering, “What’s that?”

And in the end, it’s only human nature to want to know the conclusion—which one is better, after all?

Me too. lol

If it’s easy, then the easier the better‼(￣∀￣)

However, since the best approach to investing varies from person to person, I think the best thing to do is to familiarize yourself with the options and choose the one that suits you best.

Since you are the one who will reap the rewards or suffer the losses, you should avoid simply buying stocks recommended by others.

I’ve been investing primarily in ETFs for several years now, and I’ve only used Rakuten Points to purchase mutual funds.

However, lately I’ve been leaning toward mutual funds.

Receiving replies on Twitter from people who shared my opinion has also encouraged me. lol

I’ll introduce the pros and cons of each one♪

What is a mutual fund?

First, let’s start with mutual funds.

The Investment Trusts Association of Japan provides an easy-to-understand explanation of this topic.

“Mutual funds (Fund) can be summed up in a nutshell as“Money collected from investors is pooled into a single large fund, and investment professionals use it to invest in stocks andBondsProducts that invest in and manage such assets“It is a financial product in which the returns on its operations are distributed to investors in proportion to their respective investment amounts.”

“Decisions regarding how to invest the funds raised” are made by experts based on the investment policy of each mutual fund.

Quoted from the Investment Trusts Association of Japan (General Incorporated Association)

A mutual fund is an investment vehicle in which a management company uses money collected from investors to make investments on their behalf.

A securities firm is like a retail store that sells mutual funds (products) to investors.

How the raised funds are managed varies by product.

What Are Mutual Funds?

Mutual fund products offer a variety of investment options, including stocks, bonds, and real estate investment trusts (REITs).

In addition, the countries and regions in which investments are made vary depending on the fund manager’s product.

Products that track indices such as the U.S. S&P 500 and Dow Jones Industrial Average—as mentioned at the beginning—or Japan’s Nikkei 225 and TOPIX,Index-styleis what they say

In contrast, the goal of this approach is to achieve higher investment returns (profits) than those of index-based strategies.Active TypeThat’s it.

Fees for actively managed funds tend to be higher than those for index funds.

The reason is that analyzing the information gathered and hiring staff incurs costs, rather than aiming for index tracking.

However, due to the recent popularity of index investing, management fees for actively managed funds have also been declining compared to the past.

Since management fees (commissions) for actively managed funds remain higher than those for index funds, there is a general impression that actively managed funds tend to underperform in terms of final investment returns; however, since some actively managed funds have outperformed the Nikkei 225 over the past 10 years, it cannot be said definitively that this is always the case.

Advantages of Mutual Funds (Compared to ETFs)

When comparing mutual funds and ETFs, the following two benefits can be considered:

First of all, compared to ETFs, you can start investing with a smaller amount.

Many mutual fund products can be purchased starting at 100 yen.

Second,Dividend Reinvestmentis one of its strengths

I think this is the biggest advantage of mutual funds.

When you receive dividends from an ETF, you must use those funds to purchase more of the ETF yourself.

A purchase fee is charged each time, and it’s also time-consuming.

However, with mutual funds, it is possible to reinvest dividends directly into the same mutual fund product rather than receiving them as cash.

This reduces both purchase fees and the hassle involved.

Disadvantages of Mutual Funds (Compared to ETFs)

Next, the following two points can be considered as disadvantages when compared to ETFs:

Blind methodWhat the heck is that?! ( ﾟДﾟ)㌦ｧ!!

I imagine that’s what you’re thinking, but Rakuten Securities’ glossary of financial terms actually had an easy-to-understand explanation for this.

The “blind method” refers to a system used in mutual fund transactions where, when submitting a purchase or redemption request, the price is not disclosed at the time of the request. This is because if the application price were set at the previous day’s price, fluctuations in the net asset value could result in units being sold at a price lower than the actual net asset value or redeemed at a price higher than the actual net asset value, thereby causing a disadvantage to existing unitholders.

Quoted from Rakuten Securities Toshiru

You might be wondering, “Why not use the previous day’s price?” However, since mutual funds are not publicly traded securities, they cannot be traded in real time.

However, since the stocks and bonds held in mutual funds fluctuate in value in real time, the net asset value actually fluctuates as well.

The reason it’s set up as a blind auction is that selling at the previous day’s price would likely put those who already own the item at a disadvantage.

In other words,Purchasing without knowing the priceThat’s how it goes (=_=) Can’t see it

During last year’s COVID-19 crisis, for example, both selling and buying were nerve-wracking…

Second, payment processing takes time.

Since the reference price mentioned earlier is determined after 3:00 PM, trading is limited to once per day.

Furthermore, the reference price is determined the following day, and the transaction amount is finalized the day after that; for overseas products, it is the day after the following day.

When you sell mutual funds and request a refund, it takes about 3 to 8 days for the funds to be available in cash.

It’s a golden rule to invest only surplus funds that you won’t need immediately, but be aware that you may not be able to liquidate your investment right away if an unexpected situation arises.

*Since it’s not easy to convert this into cash, I think it’s well-suited for a mandatory long-term investment.

Although management fees used to be higher than those of ETFs, the difference has narrowed significantly recently, so I will omit this point.

What is an ETF?

It is commonly referred to as an ETF, an acronym for “Exchange Traded Funds,” but

In Japanese:Exchange-Traded Fundis what it says

That’s right.

Although they work the same way as mutual funds, ETFs are listed on the stock exchange.

In other words, the key difference from mutual funds is that, just like stocks, they can be traded in real time.

Advantages of ETFs (Compared to Mutual Funds)

Compared to mutual funds, ETFs offer the following two advantages:

First of all, I think the ability to buy and sell while viewing stock prices in real time offers an advantage over the “blind” method of mutual fund investing mentioned earlier.

This is especially true for those who are accustomed to buying and selling stocks.

Second, the trust management fees are slightly lower.

This used to be the first benefit people mentioned when discussing EFTs, but since management fees for mutual funds have also been falling, there are now some products where the difference is only 0.01%.

Personally, I’m starting to see this as a benefit that’s within the margin of error (though it depends on the product).

Disadvantages of ETFs (Compared to Mutual Funds)

Next, regarding the disadvantages, there are two points to consider:

First, while you can start investing in mutual funds with as little as 100 yen, ETFs require a slightly larger initial investment.

That said, since you can buy ETFs starting with just one share, the price range varies widely from a few thousand yen to tens of thousands of yen.

Vanguard’s S&P 500 ETF, VOO, is trading at $358 as of February 21, so at an exchange rate of 105 yen per dollar, it would cost 37,590 yen (excluding fees).

Although you can pay in yen, the exchange rate isn’t very favorable, so I feel that paying in dollars might present a slight hurdle for those who are just starting to invest.

As for the second method of reinvesting dividends, as mentioned earlier in the section on mutual funds, you’ll need to purchase the ETF yourself again.

The drawbacks are the time and effort involved and the transaction fees.

If you’re looking to invest for the long term, mutual funds might be a good option.

I think the final decision varies from person to person, but I’ve recently come to feel that mutual funds offer significant benefits when held for the long term.

While there’s certainly joy in receiving dividend payments over the long term as an ETF investor, to be honest, it does take some effort to reinvest the dividends myself.

Also, even when I receive dividend payments, I often find myself buying other individual stocks or ETFs because I’m concerned about the price of my ETFs.

If you plan to invest in an S&P 500-linked index fund over the long term, a mutual fund that automatically reinvests dividends is a suitable way to set up your investment strategy.

Investment trusts are particularly well-suited for those who are just starting out with investing or who would prefer to automate their investments to some extent rather than checking them frequently; if you’re motivated by dividends, I think a combination of investment trusts and ETFs could also work well.

Since a large portion of my portfolio is in ETFs, I plan to gradually increase the proportion of mutual funds (´∇｀)

I hope this article will be helpful to those who are just starting to invest or who are unsure about which to choose between mutual funds and ETFs♪

Thank you for reading to the end! *ᴗ ᴗ)⁾⁾