Stocks vs Mutual Funds

Reading Time: 3 mins

Choosing your investment style would help you know the right asset class to invest in. Your decision would depend mainly on three factors:

  • Identify your goals: Will you use the money to get a new house or fund a retirement that’s decades away?
  • Understand your risk appetite: It’s a simple rule. The higher return you want the more risk you would need to accept. 
  • Timeframe: You need to know if you have time to do your own research or would rather have the experts do it for you?

Understanding Stocks

A stock is a type of investment that represents an ownership share in a company. When an investor buys a company’s stock, they’re purchasing a small piece of that company, called a share.

Understanding Mutual Funds

A mutual fund is a pool of money from many investors brought together in order to invest in a large group of assets — like stocks and bonds. Investors can join the fund by buying certificates. There are mutual funds with different asset allocation usually between stocks and fixed income instruments.

Your investment and goals 

If you do your homework well, your investment in stocks will probably offer you a higher return over the long-term. If you have the time to do so then you can pick your favorite stocks and enjoy the trading journey. If not, you can invest in a mutual fund, where research is a lot less. While it doesn’t have to be an either/or decision forever, beginning investors are often better at starting with funds because they offer some conveniences.

Diversification is key

One of the key benefits of a fund is its diversification. Unlike stocks, where if a few of your picks fail, your overall portfolio will be impacted. The more diversified your portfolio is, the less it would be impacted by a failed pick. Mutual funds are usually well diversified over several stocks in the case of equities and instruments in the case of fixed income. 

Opportunity

A mutual fund has a better chance of participating in certain offerings because some investments require a minimum ticket size to participate. Fund managers benefit from the shared pool of money that allows them to enter such investments. 

Examples of Investors

If your investment goal is to pay your next tuition fee or buy your marriage house, you’re better off with a fixed-income mutual fund. The mandate of such funds is to invest in low-risk instruments investments like treasury bills, treasury bonds, and corporate bonds. 

If your still of an early age and looking for a retirement that is decades ahead, then you might take a higher risk and invest in equities either directly or indirectly through an equities mutual fund managed by an expert. If you’ve done your homework with stocks picking, then you should buy the stock directly and maximize your returns.

The earlier you start investing, the more goals you can eventually achieve.

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