Mutual Funds vs. Stocks: Understand the Pros and Cons of Each | Titan (2024)

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Table of Contents

What is a mutual fund?

Similar investments

What is a stock?

What is the main difference between mutual funds and stocks?

What are the potential pros and cons of investing in mutual funds?

What are the potential pros and cons of investing in stocks?

The bottom line


Mutual Funds

Mutual Funds vs. Stocks: Pros and Cons of Each

Jun 21, 2022


5 min read

Many investors choose a diversified approach for their investment portfolio, often including mutual funds and stocks. Learn how each investment type has its benefits.

Mutual Funds vs. Stocks: Understand the Pros and Cons of Each | Titan (1)

Investors have an almost endless array of different approaches and types of assets to consider. Some investments pose a greater risk than others, but may also bring with them a greater potential for returns. Conversely, some investments may offer lower volatility in exchange for reduced returns.

Two common investments include stocks and mutual funds. Both of these can be added to an investor’s portfolio and have the potential to increase in value over time. But what is the difference in stocks versus mutual funds? And what can investors typically expect when investing in individual stocks or trading in mutual funds?

What is a mutual fund?

A mutual fund is a pooled investment that combines many different securities into one big group, or fund. These securities may include a combination of stocks and bonds, short-term debt, and more. This bundle of assets can help an investor diversify their portfolio, potentially producing acceptable returns that are balanced by limits on risk.

Investors who purchase shares of a mutual fund are, in essence, purchasing shares of the securities held within the fund. If those securities gain value, the value of the mutual fund itself grows as well. Investors will then recognize this growth through increased fund share values, quarterly dividends, and even so-called capital distributions when the fund sells assets for a profit.

Similar investments

Mutual funds have a lot in common with other bundled investment products, such as exchange-traded funds (ETFs). Both allow investors to add many different securities to their investment portfolio with a single share, helping to achieve diversification and contain risk.

However, when comparing an ETF versus a mutual fund, it’s important to note that ETFs can be traded like stocks (at any point in the trading day), whereas mutual funds trade just once at the end of the trading day. ETFs are almost all passively managed, meaning they usually try to match the performance of an index, such as the , whereas mutual funds are generally actively managed by investment professionals who select the assets with a specific goal in mind.

There are also some similarities when it comes to index funds versus mutual funds. Both involve a group of investment assets, offer many of the same protections, and may even be the same product in some cases, such as an index mutual fund. However, an index fund is designed to passively follow a specific stock market index, rather than to outperform the index.

What is a stock?

Stocks, also known as equities, are investments that represent fractional ownership of an individual company. Each share offers an investor the proportional benefit of any growth in value or earnings of that company.

What is the main difference between mutual funds and stocks?

The biggest difference between mutual funds versus stocks is diversity.

Buying stocks means buying an ownership share of a single corporation, representing a very specific asset. A mutual fund, on the other hand, combines many different assets—including individual stocks—into one grouping. They tend to be less volatile and risky than individual stocks.

Another key difference is fees. Since mutual funds are overseen by a fund manager and are often actively managed funds, there are annual costs incurred, called expense ratios. Individual stocks do not incur these same fees and expenses, although buying and selling shares can incur expenses.

At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.

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What are the potential pros and cons of investing in mutual funds?

Mutual funds offer investors diversification, but come with fees that can eat into returns.

Potential benefits of investing in mutual funds

  • Reduced risk.

    Compared to individual stocks, mutual funds can help investors protect their portfolio from market downturns, take advantage of certain upswings, and even hedge against inflation in the long-term.

  • Diversification.

    Rather than investing in a single security, mutual funds combine tens, hundreds, or even thousands of securities into a single fund. This allows investors to create a diversified portfolio.

  • Less effort.

    Rather than requiring investors to rely on their own research and expertise, mutual funds are convenient, curated products that are then actively managed. Investors don’t need to research each individual investment, saving them both time and energy.

Risks of investing in mutual funds

  • No guarantees.

    Even though mutual funds offer diversification and some protection from market volatility, they aren’t a sure bet. While the average risk in mutual funds can be lower than in other types of investments such as individual securities, they are not risk-free.

  • Fees.

    Most mutual funds are actively managed, and they charge annual fees. These fees, called the expense ratio and expressed as a percentage, are subtracted from the value of the fund’s shares. These fees can eat into the fund’s gains.

  • Limited trading.

    Compared to many other investments, which can be traded throughout the day, mutual funds can only be purchased or sold at the end of the trading day.

What are the potential pros and cons of investing in stocks?

Stocks are easy to buy and don’t come with fees, but investing in individual companies takes time and skill.

Potential benefits of investing in stocks

  • They can be traded at any time.

    Investors can buy or sell shares of individual stocks at any time during the trading day. This may allow them to take advantage of dips in purchase prices or jumps in selling prices.

  • No added fees.

    Unlike mutual funds, which are overseen by a fund manager, individual securities do not incur expense ratios. When filling a portfolio with stocks, investors have the potential to reap profits without any added annual costs.

  • Simple to buy.

    Many online brokerages make it easy for investors to buy and sell shares of stock without a commission, typically in just a matter of seconds. In fact, many high-priced stocks can be purchased as fractional shares (a portion of a single share), making them accessible even to entry-level investors.

Risks of investing in stocks

  • Investors will need to do their homework.

    Choosing the right individual stock often requires research, as well as a knowledge of that company, its specific industry, and even the stock market as a whole. If the value of that one particular stock falls, the investor will lose money.

  • Prices can fluctuate wildly.

    Stock prices can ebb and flow throughout the trading day or longer periods during bull and bear markets. Few investors, including many market professionals, have the skill needed to time their purchases or sales to profit or avoid losses. This can be a stressful, costly and time-consuming process.

The bottom line

Many investors will choose a diversified approach for their investment portfolio, often including both bundled investments such as mutual funds and ETFs, and individual securities such as stocks. Each investment type has benefits and drawbacks, depending on the investor’s willingness to trade off potential profits against the risk of volatility and losses. Both types of investments can have their place in a well-rounded portfolio.


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Mutual Funds vs. Stocks: Understand the Pros and Cons of Each | Titan (2024)


What are the pros and cons of investing in stocks vs mutual funds? ›

To risk or not to
Mutual FundsIndividual Stocks
DiversifiedLess Diversified
Lower RiskHigher Risk
Ongoing Management FeesOne-Time Fee
Beginner FriendlyNot Beginner Friendly
2 more rows

What are the pros and cons of mutual funds explain? ›

Mutual funds have pros and cons like any other investment. One selling point is that they allow you to hold a variety of assets in a single fund. They also have the potential for higher-than-average returns. However, some mutual funds have steep fees and initial buy-ins.

Which are a better investment stocks or mutual funds explain your answer? ›

Advisor Insight. 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.

What are the pros and cons of stocks? ›

Investing in stocks offers the potential for substantial returns, income through dividends and portfolio diversification. However, it also comes with risks, including market volatility, tax bills as well as the need for time and expertise.

What is the difference between mutual funds and stocks? ›

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.

What are the cons of investing in mutual funds? ›

  • Potential for loss: Mutual funds are not FDIC insured and may lose principal and fluctuate in value.
  • Cost: A mutual fund may incur sales charges either up-front or on the back end that are passed on to the investors. In addition, some mutual funds can have high management fees.
  • Tax implications:

What are the advantages of a mutual fund compared to a stock? ›

All investments carry some degree of risk and can lose value if the overall market declines or, in the case of individual stocks, the company folds. Still, mutual funds are generally considered safer than stocks because they are inherently diversified, which helps mitigate the risk and volatility in your portfolio.

What is the main advantage of mutual funds? ›

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.

What is a mutual fund its advantages? ›

Mutual funds give you an efficient way to diversify your portfolio, without having to select individual stocks or bonds. They cover most major asset classes and sectors.

Why are mutual funds better than individual stocks? ›

The most common reason someone would choose a mutual fund over a stock is that it's a convenient, hands-off way to profit from the stock market without any active management on their part. It's also an easy way to diversify your holdings, which isn't the case when you purchase a single stock.

What are the disadvantages of single stocks? ›

Cons include more difficulty diversifying your portfolio, a potential need for more time invested in your portfolio, and a greater responsibility to avoid emotional buying and selling as the market fluctuates.

Why are mutual funds considered a high risk form of investment? ›

They're prone to asset risk

Asset risk is the risk of facing losses due to the degradation in the quality of the asset or the company issuing the said asset. Since mutual funds also invest in debt instruments such as corporate bonds and debentures, asset risk is very much a part of it.

Why are mutual funds safer than stocks? ›

Investing in Mutual Funds

This diversification in investment helps spread out the risk involved which makes mutual funds a more conservative investment option as compared to individual stocks. These funds are overseen by professional fund managers and they make investment decisions on the investor's behalf.

What are the advantages for stocks? ›

Whether you buy stocks individually or through a fund, there can be several advantages for your portfolio.
  • Long-Term Gains. ...
  • Short-Term Opportunities. ...
  • Easy to Buy and Sell. ...
  • A Sense of Ownership.
Aug 30, 2023

Why are stocks beneficial? ›

The potential benefits of investing in stocks include: Potential capital gains from owning a stock that grows in value over time. Potential income from dividends paid by the company. Lower tax rates on long-term capital gains.

What are 3 advantages and 3 disadvantages of investing in mutual funds rather than stocks or bonds directly? ›

Some of the advantages of mutual funds include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing, while disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.

Why not invest in mutual funds? ›

However, mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high expense ratios charged by the fund, various hidden front-end, and back-end load charges, lack of control over investment decisions, and diluted returns.

What are the advantages of buying mutual funds instead of individual stocks? ›

Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.

Should I invest in mutual funds when market is down? ›

But ask any market expert and they'd agree that this is not the time to exit your mutual fund investments. In fact, investors who are optimistic about the market would advise you to invest more. Let us have a look at some reasons why you should remain invested in mutual funds.

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