Mutual Funds Vs. Stocks: Which one to Invest?

August 5, 2022

Areej M Alturki
Founder, Nakla

Mutual funds vs. stocks are prominent investment vehicles that enable individuals to establish portfolios and develop their wealth. Even though mutual funds frequently incorporate shares, stocks vs. mutual funds have distinct characteristics. This might appeal to a broad range of investors with varying objectives.

This article will detail the significant differences between mutual funds vs. stocks in detail. So, let's get started:

Mutual Funds Overview

Mutual funds is a kind of financial instrument made up of funds gathered from numerous individuals and spent in securities such as stocks, treasuries, money market funds, and other assets. They are managed by financial advisers, who deploy the holdings of the fund to generate revenue from the shareholder's money. Mutual fund portfolios are often created and carefully maintained to meet the investment objectives for which they were chosen.

Moreover, it provides immediate access to professionally managed portfolios of investment possibilities for individuals or small groups of participants. As a result, each investor contributes evenly to the mutual fund's profits or losses.

Pros of Mutual Funds

Can be inexpensive

Most mutual funds, passively handled index funds, can be relatively inexpensive, which means they do not have a high expense ratio. Furthermore, some brokerages provide their own portfolios with no trading expenses.

It may be less stressful

Making an investment in mutual funds is said to be less nerve-racking than spending in stocks in certain instances. If you select an index fund for your investment, you're more likely to stay updated with the market trends.

Stocks Overview

A stock (popularly known as equity) is a type of instrument that reflects ownership of a portion of a company. This allows the stockholder to a part of the company's profitability and return equivalent to the quantity of stock they possess. Stock units are referred to as "shares."

Stocks are the cornerstone of several individual investors' portfolios and are mostly traded on stock exchanges (though private trades sometimes occur). These transactions must adhere to government rules designed to safeguard investors from unscrupulous tactics.

Pros of Stocks

Simple to trade

Individual stocks are simple to buy and trade on an exchange, and various applications make the procedure hassle-free.

Low transaction fees

Stocks frequently have cheap trading expenses. Most brokerages do not impose trading costs for selected securities.

Mutual Funds vs. Stocks - Comparison of various aspects

Risk and Return

It is well-known that equity diversified mutual funds offer the benefit of lowering risk by diversifying a portfolio. On the other hand, stocks are sensitive to market changes. Moreover, the success of one share cannot substitute for the success of someone else.

Furthermore, you may think about investing in equity funds based on your risk tolerance. If you want a passive investment that matches the performance of a market index, you may invest in index funds. It is less volatile than a sector fund, which exclusively invests in equities from one industry.

Management

When considering investing in equity, you rely entirely on your expertise, which may not be enough in all market conditions. You may be limited in your access to tools and services that may assist you in successfully handling your equity investment.

All of these demerits do not apply to mutual fund acquisitions. Mutual fund companies use qualified financial professionals to manage your money as fund managers. Furthermore, the fund house has accessibility to all of the knowledge and tools needed to administer the money.

Active Vs. Passive

Direct stock investing may be beneficial if you have the patience and experience. Nevertheless, if you are not from the industry and are likely to check the performance of your stock once in a while or count on others for suggestions, you should give it a second thought before jumping into direct equity.

Stock investment requires you to be an active market player. You cannot just make an investment and then forget about stocks. You need to have good stars to make money in that scenario.

On the other hand, if you miss your mutual fund investment, you will still have chances to make high yields. This is because your portfolio is managed by fund management even in your absence. Mutual funds are ideal for inexperienced investors.

Prospective Rewards

The price for assuming less risk by investing in a mutual fund rather than equities is that most mutual funds will not grow as much as the most significant stock performance.

For instance, Amazon anticipated in its inaugural registrations with the Securities and Exchange Commission in 1997 that its stocks would eventually sell for between $14 and $16.20. However, to everyone's surprise, on April 8, 2020, Amazon stocks opened at more than $2,021. As a result, individual investors who purchased shares in the late 1990s might reap the full benefits of that stratospheric climb.

Mutual funds do not even have to include equities. Bond funds invest primarily in bonds or other forms of financial assets that pay a fixed income. Although their returns have traditionally been lower than those of stock funds, they are reasonably safe.

Portfolio Diversification

Mutual funds invest in a broad range of equities, providing superior portfolio diversification and lowering concentration risk. A large majority of varied funds in the sector include 50 or more equities in their holdings.

This diversity helps prevent portfolio losses as an alarming occurrence damages one or two stocks. The notion that stock indexes can invest 10% of their assets in a single stock decreases the risk in the investments.

Simultaneously, the shareholder's stock portfolio typically consists of 15 - 20 stocks. This translates to more instability in the account, which will be tested when the market fluctuates.

If you wish to have a similar level of diversity as a Mutual Fund, you'll require a considerable sum of money. There are other charges connected with purchasing and selling.

The advantage of mutual funds is that a trader may have exposure to a diverse range of equities across market sizes and industries by spending as little as Rs. 500 in a mutual fund.

Balancing Fees and Trading Charges

Mutual funds incur different fees based on the fund's kind and aim. Active funds that sell often and retain an asset manager may be more expensive than passive algorithmic funds. However, on average, mutual funds maintain their charges below 1% of assets under management. This is easier and the most cost-efficient substitute for a beginner or passive investor.

Stocks, unlike mutual funds, have no yearly or recurring charges to contemplate. Nonetheless, a single share might cost hundreds of dollars, significantly increasing your purchasing costs. Furthermore, most dealers still impose transaction charges, which mutual funds sometimes absorb as part of their AUM costs. 

Based on the financial objectives, you should examine the impact of costs associated with purchasing and selling particular stocks since they will affect your overall return.

Investment Horizon

In order to achieve the profits from mutual funds, you must aim for a lengthy investing horizon, such as 3-5 years. If you are watchful and take advantage of market swings, stock investing can provide you with rapid rewards. You may optimize your profits by selecting the correct shares and selling them at the right moment.

Conclusion

Stocks are individual company shares, whereas mutual funds might contain tens, if not hundreds, of equities, treasuries, or other assets. You may not have to pick between the two. Mutual funds and equities might be used in a portfolio to allow you to make wealth and achieve your financial objectives. Carefully evaluate how each could meet your requirements and investing approach.

Mutual Funds versus Stocks FAQs

Are mutual funds safer than stocks?

Because of their diversity, mutual funds are less riskier than single equities. Diversifying the investments is an essential risk-management strategy for investors who wish to invest. Hence, it can be said that Mutual funds are a secure investment that enables the client to diversify with little risk. However, reducing your risk may reduce the rewards you obtain from your investment.

Is it better to buy stocks or mutual funds?

It is better to buy any of the two depending on the amount of risk you can take for the investment. A mutual fund offers diversity by investing in a variety of stocks. Holding shares in a mutual fund is preferable than having a single stock. This is because a single stock involves greater risk than a mutual fund. 

Stay Updated with the Latest Trends

Create an account for free and get started instantly.

Now, what to wait for, it’s time to put your funds to work today.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.