Funds/ETFs are investment funds that collect money from several investors and pool it to make investments (i.e., buy stocks, bonds, mutual funds, etc.). Hence, they are known as investment funds. 

More About Funds/ETFs

Continue reading to learn more about:

How do funds work?
How are funds taxed?
What do you mean by exchange-traded funds?
Can you cash out your ETFs anytime?
What is the difference between funds and shares?

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How do funds work?

Funds and ETFs are baskets of securities that trade like stocks. They provide instant diversification. Because they trade like stocks, you can buy them anytime the stock market is open. Unlike mutual funds, which must be held long-term, you can buy funds or ETFs to meet short-term needs. And funds aren't just for retirement—you can use them to save for your child's education in an education fund or for other goals, too.


How are funds taxed?

Funds and ETFs are professionally traded securities that track a particular index or sector in the stock market. The IRS taxes these investments differently than stocks, bonds, or other securities. Funds typically distribute their income at the end of each year through capital gains dividends, or interest. Capital gain distributions are taxable for investors. Funds pay capital gains taxes to the IRS at the time of distribution. Financial institutions handle taxation for ETFs, so you have little to worry about with regard to tax payments from your fund investments.


What do you mean by exchange-traded funds?

Exchange-traded funds, or ETFs, are packages of securities that behave much like mutual funds. They allow investors to purchase and sell shares to match any market index. This is a simple way for investors to buy into various asset classes, such as stocks and bonds.
ETFs are listed on stock exchanges just like stocks, but they are bought and sold during the day like shares, hence the term "exchange traded." There are many different ETFs investing in stocks, bonds, and other assets.
  • Can you cash out your ETFs anytime?

    It depends on what kind of ETF you own. Certain types of ETFs are designed to be credited with dividends, which you can withdraw as cash. Other types invest in stocks that pay dividends, but only if you hold onto them for a certain length of time, or until the stocks mature.
  • What is the difference between funds and shares?

    Consider the differences between funds and shares. Funds are the combined investments of a number of people, while shares refer to an individual investor's portion of an investment. Both fund and share prices can be volatile due to both general economic conditions and individual factors affecting specific companies, but long-term returns tend to be higher for shares.