Mutual Funds Vs. Stocks: Which Should You Invest In? | Bankrate (2024)

Stocks and mutual funds are both popular types of investments, allowing investors to build portfolios and grow their wealth. However, even though mutual funds often contain stocks, mutual funds and stocks have different traits that can appeal to various investors with different goals.

Here are the key features, as well as pros and cons, of stocks vs. mutual funds.

Stocks vs. mutual funds

Stocks and mutual funds both offer ways to construct a portfolio, but there are differences in the way they operate, as well as what you can expect in the long run.

A stock represents a share of ownership in a company. When a company, like Tesla (TSLA) or Amazon (AMZN) does well, those who own shares receive the benefit. As the company grows the business, the stock price usually goes up along with it, giving investors the opportunity to sell shares for more than they bought them for.

Meanwhile, a mutual fund is a pooled investment that contains shares of many different assets. Many mutual funds include a wide range of stocks and bonds, often hundreds. When you buy shares of a mutual fund, you receive a slice of everything included.

Additionally, there are index mutual funds that track popular indexes that can be purchased at very low costs. Other funds might be actively managed, where a professional chooses what’s included in the mutual fund based on different goals like growth or income. Actively managed funds come with higher fees and have typically underperformed passive funds over long time periods.

You can purchase stocks and mutual funds through your brokerage account. Employer-sponsored retirement plans, such as 401(k)s, mostly invest in mutual funds, so you might already own these funds without realizing it.

The pros and cons of stocks

Stocks offer a potentially valuable way to grow your wealth and take advantage of big price moves, but they also come with some drawbacks.

Pros

  • Easy to trade — Individual stocks are easy to trade through an online broker, and there are a number of apps that make the process intuitive.
  • Potential for large gains — Depending on stock performance, you could see large gains. This could lead to more wealth down the road.
  • Low trading costs — In many cases, stocks come with low trading costs. In fact, many brokerages don’t charge trading fees for individual stocks.

Cons

  • Potential for large losses — While there is the potential for large gains, you could also end up with large losses if the stock price drops and doesn’t recover.
  • Research takes time — It can be time consuming to research stocks and choose the assets that work best for your portfolio.
  • Stress — Investing in stocks can feel like an emotional rollercoaster. It’s important to understand your own risk tolerance before you start investing.

The pros and cons of mutual funds

Mutual funds can provide some diversity in your portfolio, but they aren’t foolproof. Here’s what you should know.

Pros

  • Can be low cost — Many mutual funds, especially passively-managed index funds, can be low cost, meaning they don’t charge a large expense ratio, or fee. Additionally, some brokerages offer their own funds without trading fees.
  • Instant diversification — Because you’re investing in a basket of assets, you have instant diversification, and therefore lower risk, and don’t need to buy multiple individual stocks to diversify your portfolio.
  • Can be less stressful — In some cases, investing in mutual funds can be less stressful than investing in stocks. Because you own a diversified portfolio of stocks, the fund is likely to be less volatile than if you just owned a handful of stocks on your own.

Cons

  • Some funds have sales “loads” — There are mutual funds that charge a fee when you buy or sell shares. These sales loads can cost you before you even start investing.
  • Can be high cost – Some funds charge a high expense ratio, sometimes above 1 percent of your investment in the fund annually, but lower-cost funds are available.
  • May not be tax-efficient — If the mutual fund has sold assets and seen a gain, you might see distributions that create a taxable gain. So even if you haven’t sold your mutual fund shares, you could still be subject to capital gains taxes.
  • Could underperform the market — If you have an actively managed mutual fund, or a fund that is managed by a team of traders, it might not perform as well as the market and you could even lose money. The expense ratios are typically higher for actively managed mutual funds, too.

Stocks vs. mutual funds: Which is a better investment?

Whether stocks or mutual funds are better for your portfolio depends on your personal goals and risk tolerance.

For many investors, it can make sense to use mutual funds for a long-term retirement portfolio, where diversification and reduced risk are important. For those hoping to capture value and potential growth, individual stocks offer a way to boost returns, as long as they can emotionally handle the ups and downs.

For beginners who have a small amount to invest: Starting with index mutual funds and making regular contributions can be an effective way to build a portfolio. Later, after becoming more experienced, consider branching out into individual stocks. Carefully consider your goals and use investments to create a strategy designed to help you get there.

If investing in the stock market feels too risky for you, consider these low-risk investments for your portfolio.

Bottom line

Stocks represent shares in individual companies while mutual funds can include hundreds — or even thousands — of stocks, bonds or other assets. You don’t have to choose one or the other, though. Mutual funds and stocks can both be used in a portfolio to help you grow your wealth and meet your financial goals. Carefully consider how each might fit your needs and personal investing style.

You might also consider investing in exchange-traded funds, or ETFs. When comparing mutual funds vs. ETFs, you’ll notice a lot of similarities, but there are differences too. Be sure to do your research before investing.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

Mutual Funds Vs. Stocks: Which Should You Invest In? | Bankrate (2024)

FAQs

Should I invest more in stocks or mutual funds? ›

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 is the safest investment with the highest return? ›

Here are the best low-risk investments in April 2024:
  • High-yield savings accounts.
  • Money market funds.
  • Short-term certificates of deposit.
  • Series I savings bonds.
  • Treasury bills, notes, bonds and TIPS.
  • Corporate bonds.
  • Dividend-paying stocks.
  • Preferred stocks.
Apr 1, 2024

Should we invest in mutual funds or not? ›

Mutual fund investments when used right can lead to good returns, keeping risk at a minimum, especially when compared with individual stocks or bonds. These are especially great for people who are not experts in stock market dynamics as these are run by experienced fund managers.

Is it better to buy individual stocks or index funds? ›

Investing most or all your money in individual stocks is risky and can lead to losing your investment capital. Investing exclusively in index funds is risk averse and offers much less in the way of returns. Ideally, you want to keep most of your investment dollars in safer investments such as index funds.

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 disadvantages of putting your money in mutual funds and stocks? ›

Potential Cons
  • High fees. Mutual funds have expenses, typically ranging between 0.50% to 1%, which pay for management and other costs to operate the fund. ...
  • Market risk. Just as with stocks and bonds, mutual funds generally have market risk, meaning that prices can fluctuate up and down. ...
  • Manager risk. ...
  • Tax inefficiency.
Oct 6, 2023

What is the best thing to invest in right now? ›

11 best investments right now
  • High-yield savings accounts.
  • Certificates of deposit (CDs)
  • Bonds.
  • Money market funds.
  • Mutual funds.
  • Index Funds.
  • Exchange-traded funds.
  • Stocks.
Mar 19, 2024

What is the safest and best way to invest $100000? ›

Best Investments for Your $100,000
  • Index Funds, Mutual Funds and ETFs. If you're looking to invest, there are a lot of options. ...
  • Individual Company Stocks. ...
  • Real Estate. ...
  • Savings Accounts, MMAs and CDs. ...
  • Pay Down Your Debt. ...
  • Create an Emergency Fund. ...
  • Account for the Capital Gains Tax. ...
  • Employ Diversification in Your Portfolio.
Dec 14, 2023

What is the safest investment in a recession? ›

Treasury Bonds

Investors often gravitate toward Treasurys as a safe haven during recessions, as these are considered risk-free instruments. That's because they are backed by the U.S. government, which is deemed able to ensure that the principal and interest are repaid.

Why people don t invest in mutual fund? ›

As the funds are invested in market instruments, they carry certain stock market risks like volatility, fall in share prices etc., which deters us from investing in mutual funds. As we don't want to lose money, we often let it stagnate in our savings accounts.

What is one downside of a mutual fund? ›

Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.

Who should not invest in mutual funds? ›

Mutual funds are managed and therefore not ideal for investors who would rather have total control over their holdings. Due to rules and regulations, many funds may generate diluted returns, which could limit potential profits.

Do mutual funds outperform individual stocks? ›

Mutual funds have several advantages over individual stock picking. Beyond diversifying your holdings, some mutual funds aim to outperform the stock market, while others mirror a popular index like the S&P 500.

Is it better to buy S&P 500 or individual stocks? ›

Once you've opened an investment account, you'll need to decide: Do you want to invest in individual stocks included in the S&P 500 or a fund that is representative of most of the index? Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky.

Is it OK to only invest in index funds? ›

If you're new to investing, you can absolutely start off by buying index funds alone as you learn more about how to choose the right stocks. But as your knowledge grows, you may want to branch out and add different companies to your portfolio that you feel align well with your personal risk tolerance and goals.

Which investment is most diversified? ›

Diversification is most often done by investing in different asset classes such as stocks, bonds, real estate, or cryptocurrency. Diversification can also be achieved by purchasing investments in different countries, industries, sizes of companies, or term lengths for income-generating investments.

How much should you invest in mutual funds? ›

To determine how much to invest in Mutual Funds monthly, subtract your monthly expenses including contributions to your emergency fund and short-term goals from your monthly income. The remainder is what you can allocate to investments.

How much would I need to save monthly to have $1 million when I retire? ›

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.

Which type of investments generally have the highest potential returns? ›

Key Takeaways. The U.S. stock market is considered to offer the highest investment returns over time. Higher returns, however, come with higher risk. Stock prices typically are more volatile than bond prices.

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