New on FinoLib · Volume I: Global Economy
New on FinoLib, my finance education website: I have published an article called Mutual Funds vs Index Funds vs ETFs: How Asset Management Works, from Volume I: Global Economy. Here is what the article explains, written as a short expert briefing; the full piece, with every worked example, is one click away.
The idea in plain words
Asset managers pool savers’ money into funds priced at net asset value, and they charge an expense ratio that compounds into a large cost over decades. Index funds track a benchmark cheaply, and ETFs trade all day and stay near net asset value.
Key points
■US-registered funds held $45.1 trillion at year-end 2025, $31.4 trillion in mutual funds and $13.4 trillion in ETFs, and 76.0 million US households (56.4%) owned at least one fund.
■A fund with $1,020 million of securities and cash, $20 million of liabilities and 40 million shares outstanding has a NAV of $25.00.
■In 2025 the asset-weighted average expense ratio was 0.64% for actively managed US equity mutual funds and 0.05% for index equity mutual funds.
■Over 30 years at an illustrative 7% before fees, the index fund ends with $75,063 against $63,584, so the active fund ends about 15% poorer.
A closer look
An asset manager pools money from many savers and invests it under a stated mandate. The legal vehicle is the fund; the business that runs it for a fee is the asset management company (AMC), the official term in India. The fund’s securities sit with an independent custodian, separate from the manager’s own balance sheet. Because the manager is paid a percentage of assets, the business rewards scale: in the US the 10 largest fund families manage most of the money in index mutual funds. US-registered funds held $45.1 trillion at year-end 2025, $31.4 trillion in mutual funds and $13.4 trillion in exchange-traded funds, and 76.0 million US households (56.4%) owned at least one fund.
A worked example
Trace the Chain — Part 4 Thought Experiments
1. A Bengaluru startup raises Series C at a $900M valuation from a fund whose LPs include a Canadian pension plan. Trace the ownership chain from a Canadian teacher’s salary to the startup’s payroll. 2. Why might a company’s IPO price be set to “pop” 20% on day one — and who wins and loses from that pop? 3. A famous short seller publishes a report on a company you own. List what should determine your reaction — before checking chapter 4.8: Short Selling — Betting on Falling Prices’s answer.
Under the hood
Under the Hood: Why an ETF’s Price Stays Close to Its NAV
An ETF’s price is set by trading, not by the fund, so something must stop it drifting away from the value of what it holds. That something is a set of large dealers called authorized participants (APs), which can create or redeem ETF shares directly with the fund in large blocks, usually by handing over or taking back the underlying basket of securities rather than cash. Suppose the basket behind each share is worth $50.00 (the NAV) and the ETF trades at $50.10, a premium of $50.10 ÷ $50.00 − 1 = 0.2%.
The Simple Version
Most people do not buy shares one company at a time; they buy a slice of a fund that owns hundreds. An active fund pays managers to pick winners; an index fund simply buys the whole index and charges a fraction of the fee. Because trillions of dollars now sit in funds, millions of savers adding or withdrawing money each month become waves of buying and selling that move entire markets.
Where Economists Disagree: Active vs Passive
The case for passive investing starts with arithmetic. William Sharpe showed in 1991 that, because active and passive investors together own the whole market, the average actively managed dollar earns the same as the average passively managed dollar before costs, and so less after costs. The scorecards agree: S&P Dow Jones Indices found that 79% of active US large-cap funds trailed the S&P 500 in 2025, and 93% over the 20 years to December 2025.
Recap
Asset managers pool savers’ money into funds priced at NAV, charging an expense ratio that compounds into a large cost over decades: 0.05% versus 0.64% cost about 15% of a 30-year outcome in the worked example. Index funds track a benchmark cheaply, ETFs trade all day and stay near NAV through authorized participants, and flows from foreign investors, domestic institutions and SIPs move markets.
What the full article covers
The full article includes worked examples, a look under the hood at the mechanics, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume I: Global Economy
Read the full article on FinoLib
The complete article, Mutual Funds vs Index Funds vs ETFs: How Asset Management Works, with every worked example, diagram, quiz and source, is free to read in Volume I, Global Economy on finolib.com.
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