Buy Mutual Funds on Margin

Buy Mutual Funds on Margin

It is possible to buy a stock on Margin. But the question here is that, Is it really possible to buy mutual funds using a margin account? Well, the answer is Yes & No both.

You can not trade the conventional mutual funds. Because they don’t work like stocks. In fact, one mutual fund scheme is not a single stock but it’s the portfolio of 30-150 carefully chosen stocks by a fund manager.

Mutual fund shares are issued to buyers and redeemed from sellers directly by the fund company. Fund share prices (Units or NAV or Net Asset Values) are determined once a day after the close of business and are based on the closing prices of the underlying securities in the fund's portfolio. Fund share buy and sell prices are not posted until the day after the transactions occur. A mutual fund's net asset value per share reflects this type of pricing.

While some brokerage firm margin policies may allow for an investor to borrow against their mutual fund positions, mutual funds themselves are prohibited from trading on margin. Additionally, mutual funds are also prohibited from selling short to participating in joint trading ventures.

And because of this limitation to conventional mutual funds, Exchange Traded Funds are introduced in the stock market. As the name suggest, they can be easily traded by the traders on the stock exchange like a stock.

How Exchange Traded Funds Work?

Think of an exchange-traded fund as a mutual fund that trades like a stock. ETFs are just like the Index funds. They represent the basket of stocks such as S&P 500 or so. So you can short or trade whole the index at a time just like a stock that otherwise you can not do with the index mutual funds. Because the Index mutual funds are the conventional types of mutual funds.

Types of ETFs
The first exchange-traded fund was the S&P 500 index fund (nicknamed spiders because of their SPDR ticker symbol), which began trading on the American Stock Exchange (AMEX) in 1993. Today - tracking a wide variety of sector-specific, country-specific and broad-market indexes - there are hundreds of ETFs trading on the open market.