Mutual funds are investment vehicles that pool money from multiple investors to buy a diversified portfolio, while stocks represent ownership in a specific company and their value fluctuates based on the company's performance and market conditions.
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Key Takeaways
Mutual funds diversify investments, reducing risk, but also limit potential gains.
Mutual funds are managed by professionals, reducing the need for monitoring, but investors give up control.
Stocks offer higher returns but come with higher risk and volatility.
Both mutual funds and stocks have fees and expenses that can affect investment returns.
The choice between mutual funds and individual stocks depends on an investor's goals, time horizon, and risk tolerance. A diversified portfolio may offer a good balance.
As a new investor, it's helpful to consider your investment choices, including the choice of mutual funds or stocks. Confused? Many new investors are.
What is the Difference Between Mutual Funds and Stocks?
When you invest in individual stocks, you're buying shares (the stock) of a single company. When you invest in a mutual fund, you're buying shares in a fund which invests in multiple securities such as:
Stocks
Bonds
Money market instruments
Other assets
Each mutual fund usually has an investment objective that states how the fund will invest.
This may be based around a number of things including:
An industry (financial, real estate, technology, healthcare, etc.)
A region (European, American, Asian or emerging markets)
An index.
People have different reasons for buying mutual funds vs. stocks. Someone could do both as part of their investment strategy.
Pros & Cons of Mutual Funds
Investing in mutual funds workfor those who want to participate in the stock market but don't necessarily want to pick and follow specific stocks. Owning "baskets" of stocks gives investors the advantages of being in the stock market and diversifying their investmentswhile saving them the trouble of picking their own stocks by letting financial pros do the picking or by using an automated index approach.1
Pros of Mutual Funds
Risk is spread out by investing in multiple companies as part of a diversified investment fund. It can be harder to do when picking individual stocks.
If an individual stock loses value, other stocks in the mutual fund help to balance it out.You haven't put all your eggs in one basket, however, all the stocks in a fund could lose value at the same time.
A financial professional chooses which stocks go into the fund and then manages it. You don't have to closely monitor individual stocks.
If you're interested in a specific industry sector, you can invest it that sector without having to individually choose stocks.
Cons of Mutual Funds
If a single stock excels, you miss out on some of that high growth. You'll benefit from that growth if the stock is included in your mutual fund, but not to the same extent, as the stock will be diluted by the others in the fund.
Those who prefer greater control over their investments may not like giving away choice in stocks to a mutual fund's managers.
Some funds have minimum investment rules and require the fund be held for a certain amount of time before cashing out or you could be charged a fee if you cash out early. Mutual funds also charge a percentage of the investment as a management fee.
Pros & Cons of Stocks
Buying stocks can be a good choice for people who want to own specific stocks and are able to handle more potential volatility.
Pros of Stocks
You control what stocks you invest in.
If a stock soars, you'll get all the benefit from that increase. If you had that stock in a mutual fund, the benefit would be diluted by the other stocks in the fund, but also have to bear all the loss if that stock falls in value.
People might find it exciting and rewarding to pick and follow specific stocks.
Cons of Stocks
Stocks can be volatile. The highs and lows are emotionally difficult for some investors.
It can be time-consuming to monitor individual stocks. This isopposed to simply buying and holding a share in a mutual fund.
You could be charged a brokerage fee every time you buy or sell an individual stock.
The Bottom Line
If you haven't previously been investing in mutual funds or buying your own stocks, or new to investing, you could try each approach to see which you like best, as long as you keep the potential risks in mind. There are risks involved in both types, including the potential to lose the entire principal amount invested. Those who are new to investing might find it easier to invest in mutual funds.
Whatever you choose, your investments decisions should always be based on your individual goals, time horizon and risk tolerance.
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Footnotes
Diversification cannot guarantee a profit or protect against a loss in a declining market.
Mutual funds are generally considered a safer investment than stocks because they offer built-in diversification—something that helps mitigate the risk and volatility in your portfolio.
A mutual fund provides diversification through exposure to a multitude of stocks. The reason that owning shares in a mutual fund is recommended over owning a single stock is that an individual stock carries more risk than a mutual fund. This type of risk is known as unsystematic risk.
All investments carry some risk, but mutual funds are typically considered a safer investment than purchasing individual stocks. Since they hold many company stocks within one investment, they offer more diversification than owning one or two individual stocks.
Mutual funds offer convenience because investment decisions are left to a professional fund manager. Some investors prefer an index mutual fund, which tracks a market index and generally has lower fees compared with actively managed funds.
Nobody can predict the market movements. Hence, instead of focusing on timing the market, one should be disciplined and should keep on investing in equity mutual funds irrespective of the market fluctuations. In the long term, these short term fluctuations do not affect your investments.
Buying stocks means you get to own a part of an individual company represented by that stock. This investment offers potentially higher returns if you invest in companies having strong growth potential. But this investment is also riskier than MFs as it carries higher volatility.
Mutual funds offer diversification or access to a wider variety of investments than an individual investor could afford to buy. There are economies of scale in investing with a group. Monthly contributions help the investor's assets grow. Funds are more liquid because they tend to be less volatile.
Just as with stocks and bonds, mutual funds generally have market risk, meaning that prices can fluctuate up and down. They also have principal risk, which means you can lose the original amount invested. Remember that investments cannot guarantee growth or sustainment of principal value; they may lose value over time.
Assuming you do go down the road of picking individual stocks, you'll also want to make sure you hold enough of them so as not to concentrate too much of your wealth in any one company or industry. Usually this means holding somewhere between 20 and 30 stocks unless your portfolio is very small.
Managed by Experts: Unlike standalone securities, mutual funds are managed by experts, so they are considered safe and secure. 3. Diversity: Based on the theme and category of mutual funds, investors get the exposure to a large number of stocks across the market capitalisation spectrum.
There is no better time to start investing. It is very difficult to time the markets and although the markets are due for a correction, it would not be wise to wait further. Also, when it comes to SIPs, there is not much merit in timing the markets. We would suggest you invest in different mutual fund categories.
However, during a market crash, stock prices come down. This, in turn, pulls down the performance of mutual funds holding these stocks. Companies, too, face a tough time with their operations taking a hit, and it takes time for stocks to recover. Performance improves only when stocks recover lost ground.
It found that over the course of one year, 51.08% of actively-managed mutual funds underperformed the S&P 500, and 48.92% of actively-managed funds outperformed the S&P 500. * However, those numbers change dramatically over longer periods of time.
When it comes to equity, it is very important that, especially when you are thinking about long-term goals, you want to exit as soon as you have 2-3 years left approaching your goal and there are just 2-3 years to get there.
Suppose you're starting from scratch and have no savings. You'd need to invest around $13,000 per month to save a million dollars in five years, assuming a 7% annual rate of return and 3% inflation rate. For a rate of return of 5%, you'd need to save around $14,700 per month.
Many people see mutual funds as a great investment vehicle. Consider the advantage: Because they're funds that contain a variety of assets, you get automatic diversification. If Company A's stock crashes, you'd lose a lot if you were directly invested in it.
You must strive to save at least 30% of your gross income or ₹60,000 every month. To calculate how much amount you should invest in SIPs, we will have to use the standard formula, which is 100 minus your age to be invested in equity through mutual funds.
Introduction: My name is Trent Wehner, I am a talented, brainy, zealous, light, funny, gleaming, attractive person who loves writing and wants to share my knowledge and understanding with you.
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