The battle of Mutual Funds vs Stocks is the most common one in the investor world. Every investor has to make this decision at one point of time during his investment journey. Beginner investors usually have to make this decision early on when starting their investment journey.
Mutual funds and stocks each offer specific types of advantages to investors. Generally speaking, stocks offer higher returns while mutual funds offer greater stability. Which one is the right for investors ultimately depends on your goals, risk profile, and his/her investment strategy. It’s always wise to limit your exposure to risky investments like the best altcoins.
Before discussing the advantages and disadvantages of each security, let’s first understand the basics of both.
A mutual fund is a collection of securities bundled together, which are traded on the stock exchanges as a single security. Mutual funds can include a variety of securities which include individual stocks or bonds, or other assets. They are usually handled by professional money managers who handle the money for multiple investors. These money managers allocate the investments of people that generate an income or capital gains for the investors. Ultimately, investing in a mutual fund means purchasing a portion of one larger and diversified portfolio.
Also, if you are seeking whether you should invest in ETFs or Index funds, read ETFs vs Index funds. ETFs and Index Fund both provide a diversified portfolio.
Pros and Cons of Investing in Mutual Funds
Here are the biggest advantages of investing in mutual funds
- Diversification is one of the biggest advantages of investing in Mutual Funds. Since a mutual fund is made up of thousands of stock holdings across all industries, you don’t have to worry about having all your eggs in one basket.
- The ability to purchase fractional shares. Investors can invest in mutual funds with lesser money and this way they don’t have to spend money for a full share of every security within the mutual fund. Get to know about RSI trading strategies.
- Multiple options are available within mutual funds and investors can easily pick whichever suits them. If the investors want to invest in dividend-paying stocks, they can pick that specific mutual fund that has dividend-paying stocks. If the investor wants to invest in multiple large-cap companies, he/she can pick that fund that has large-cap companies in its portfolio. Get to know the safest monthly dividend stocks.
- Mutual Funds are professionally managed portfolios. A team of managers works together to create the best portfolio for their clients. Moreover, they continue to manage it over the life of the fund. As a result, the fund’s portfolio is ever-changing to keep up with what is happening in the stock market.
- Investors have the option of reinvesting their dividends. Doing this helps grow the investment and leads to a higher return in the end.
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No doubt mutual funds are great but there are some drawbacks to them also:
- One of the biggest downsides to mutual funds is the huge number of options available. There are over 7,500 different types of mutual funds investors can choose from. What confuses the investors is that majority of these mutual funds are similar, the only difference is the financial company which is offering it. Investing in fintech stocks is a smart investment move today.
- With mutual funds, investors will have overlapping stocks. If you have invested in multiple mutual funds, for example, large-cap and growth funds, chances are many stocks in these two funds will be overlapping. Therefore, while investors choose to diversify further with multiple categories of mutual funds, they eventually end up with similar company stocks. With the demand for AI technology increasing, investor interest in Artificial Intelligence stocks has also increased.
- With mutual funds, investors have no control over their capital gains. Hence, you cannot limit how much tax you have to pay on your earnings.
- Mutual funds are comparatively costly because of the fees the money managers charge. In fact, investors have to pay this fee irrespective of how the fund is performing.
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Stocks are shares of companies that are traded on all major exchanges around the world. It represents ownership of the company. Market and economic factors, company financials, and operations contribute to the overall price of a specific stock. Sometimes stockholders receive a portion of earnings in the form of dividends. The investors can choose to reinvest this money or cash them. If you are seeking a steady stream of income, you should invest in REIT stocks.
Stock investing is a comparatively riskier investment than mutual funds but they also offer a higher return. In contrast, are less risky but it comes at the cost of lower returns.
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Pros and Cons of Investing in Stocks
While it may not be for everyone, stock market investment has its own set of benefits for investors:
- Investors can build up their wealth over time with stocks. Over longer periods, the stock market has proven to provide a good return.
- Investors can pick any stock from the stock market they want. It gives them greater control over their investment. Get to know the best EV stocks to invest in today.
- High liquidity is one of the best features of stock investing. You can buy and sell stocks any time you want.
- It is very easy to start stock trading and you can do it with as low as the price of one share.
- Compared to other securities the fees of stock trading are very low. You simply have to pay a brokerage/ commission fee.
Read about: Swing trading vs Day trading.
Benefits aside, every financial instrument comes with its baggage of disadvantages:
- Lack of diversification is one of the major drawbacks of stock investing. All the money is tied up in the specific company stock you have invested. And if the stock price falls, so does your invested money. Investors are now looking for the finest solar energy stocks to invest in.
- You have to do your research yourself. Unlike mutual funds which are handled by professionals, stock investing requires the investors to do their homework themselves. And in order to be successful in stock trading, stock investment involves a lot of research and spending time watching the market. Cybersecurity stocks are also one of the best investment opportunities.
- With stocks when the chances of increasing wealth are high, the risk of losing money is also high. No matter how much research you do or how well the company is performing, often external factors have a huge impact on the company’s stock price which is out of control of everyone.
- Investing in stocks comes with the risks of market swings, hence the investor has to be an active trader to save his invested money from losses.
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Mutual Funds and Stock: A Comparison
Below is a comparison table for mutual funds and stocks:
|1||Diversification||Limited Diversification||High-level Diversification|
|2||Cost||One-time brokerage fee||An expense ratio for the whole life of the investment|
|3||Risk||High Level||Low-level risk|
|4||Liquidity||Can be easily purchased on the exchange during trading days within the trading hours||Can only be bought at market close each trading day.|
|5||Research||Intensive Research Required. It is important to understand the company’s performance before investing||Very low research is required. Only need to find a mutual fund that matches your investment goal.|
|6||Customization||Maximum customization as you can pick any stock you want||Very low customization as the portfolio composition is predetermined.|
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Mutual Funds are a diversified portfolio of securities. It provides exposure to a variety of securities. Whereas, stocks don’t have this benefit of diversification. These are company stocks and the only diversification an investor can do is invest in different company stocks belonging to multiple sectors.
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For stock trading, investors only have to pay the brokerage fee or the commission fee. While the expense ratio of mutual funds is higher and the investor has to pay this amount annually, for the complete life of the fund. Therefore, investing in mutual funds is costly. Investing in financial stocks is not as simple as picking the best bank stocks.
Since stocks pertain to individual companies, they are prone to volatility. Moreover, apart from company performance, external factors like sector dynamics, industry ongoings, and macroeconomic factors also have a huge impact on the overall health of the stock. Therefore, the risk level is high for these stocks. On the other hand, mutual funds have a specific portion of their portfolio invested in stocks. And the remaining money is invested in another investment instrument. This automatically reduced the risk factor for mutual funds.
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Talking about liquidity, stocks are highly liquid as they are traded on the stock exchange throughout the day during trading hours and on trading days. Whereas, the buying and selling of mutual funds are different. They are bought through money managers after the trading day ends.
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Level of Research Required
While investing in stocks, doing research is the investor’s responsibility. It is his choice how much in-depth he wants to go before deciding upon the company for investment. On the other hand, mutual funds have a pre-determined portfolio of securities. Investors just have to contribute the money; the rest is handled by the money managers. Investing in value stocks is a long-term investment.
Level of Customization
Investors have full liberty to choose any stock that is being traded on the stock exchange. They can choose any stock that seems suitable for them and invest as much money as they want. But mutual funds don’t offer this freedom. Investors have zero control over which company or security they want to invest in. They can only monitor and rebalance their portfolio from time to time. In today’s world where information is just a click away, following the right trading blogs is very important.
Best Performing Mutual Funds
As per the analysts at GOBankingRates, below is the list of best performing Mutual Funds for 2022:
- BlackRock Mid-Cap Value Fund Investor A Shares
- Year-to-date performance: -10.32%
- Five-year performance: 11.79%
- 10-year performance: 12.06%
- Expense ratio: 1%
- Madison Dividend Income Fund Class Y
- Year-to-date performance: -11.98%
- Five-year performance: 12.21%
- 10-year performance: 12.70%
- Expense ratio: 0.91%
- Putnam Large Cap Value Fund Class A
- Year-to-date performance: -12.14%
- Five-year performance: 12.05%
- 10-year performance: 13.56%
- Expense ratio: 0.88%
- Janus Henderson Balanced Fund Class T
- Year-to-date performance: -19.33%
- Five-year performance: 9.46%
- 10-year performance: 9.57%
- Expense ratio: 0.82%
- BlackRock Sustainable Balanced Fund Investor A Shares
- Year-to-date performance: -17.63%
- Five-year performance: 8.46%
- 10-year performance: 9.65%
- Expense ratio: 0.76%
- Fidelity Multi-Asset Income Fund
- Year-to-date performance: -16.04%
- Five-year performance: 8.83%
- 10-year performance: N/A
- Expense ratio: 0.78%
- Calvert Core Bond Fund Class A
- Year-to-date performance: -11.40%
- Five-year performance: 3.84%
- 10-year performance: 4.22%
- Expense ratio: 0.74%
- Payden High Income Fund Investor Class
- Year-to-date performance: -12.24%
- Five-year performance: 4.36%
- 10-year performance: 5.12%
- Expense ratio: 0.60%
- Guggenheim Core Bond Fund Class P
- Year-to-date performance: -14.06%
- Five-year performance: 1.70%
- 10-year performance: 3.26%
- Expense ratio: 0.79%
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Best Performing Stocks
Here are 13 stocks in the S&P 500 that currently have the highest ROEs, according to Finviz:
- Hilton Hotels Corporation (NYSE: HLT)
- ROE 900.7 %
- IDEXX Laboratories, Inc. (NASDAQ: IDXX)
- ROE 769.6 %
- O’Reilly Automotive Inc (NASDAQ: ORLY),
- ROE 391.7 %
- Moody’s Corporation (NYSE: MCO)
- ROE 372.4 %
- S&P Global Inc (NYSE: SPGI)
- ROE 332.4 %
- Lockheed Martin Corporation (NYSE: LMT)
- ROE 292.4 %
- H & R Block Inc (NYSE: HRB)
- ROE 288.6 %
- United Parcel Service, Inc. (NYSE: UPS)
- ROE 130.3 %
- Mastercard Inc (NYSE: MA)
- ROE 125.7 %
- Clorox Co (NYSE: CLX)
- ROE 118.9 %
- Seagate Technology PLC (NASDAQ: STX)
- ROE 105.5 %
- Mettler-Toledo International Inc. (NYSE: MTD)
- ROE 100.0 %
- Qualcomm, Inc. (NASDAQ: QCOM)
- ROE 98.5 %
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Mutual Funds vs. Stock. Which is better?
The advantages of mutual funds are portfolio diversification, professional management, lower risk, and convenience. On the other hand, one of the primary benefits of investing in the stock market is the chance to grow your money. The stock prices fluctuate all day. But investment in stable companies has proven to provide good returns to investors.
Now comes the question of which is a better option.
This question can be better answered when aligned with your priorities. If you can contribute enough time to investing and want to be involved and in control of your investments investing in stock is a better option for you. But it comes with the risks which you should be aware of before playing with your hard-earned money. Regional bank stocks offer an excellent return to investors.
However, if you have other priorities and cannot set aside time for trading then investing in mutual funds is a much better option. You will have a diversified portfolio while a professional team manages your portfolio.
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