Is a mutual fund riskier than a stock? (Differences & What to Invest In)


If you’re new to investing, you might wonder whether stocks or mutual funds are the best investments for beginners.

What is a stock?

A stock is a share of ownership in a company. When you buy a stock, you become a part-owner of that company.

What is a mutual fund?

A mutual fund is a basket of stocks, bonds, or other securities. When you invest in a mutual fund, you are buying a small piece of many different companies.

Key Differences

Here are the key differences between stocks and mutual funds:

Feature Stocks Mutual Funds
Investment type Ownership in a single company Basket of stocks, bonds, or other securities
Investing style Active or passive Passive
Who makes decisions Investor Professional fund manager
Costs Commissions when you buy and sell; no ongoing fees after purchase Annual expense ratios; may have sales loads, redemption fees, and transaction fees
Diversification Only as part of a well-diversified portfolio Built-in diversification in a single investment
Risk Higher; performance is tied to a single company Lower; risk mitigated through diversification
Customization High; you choose the stocks you want Low; a fund manager chooses the investments
How it trades During regular market hours Once per day
Beginner friendliness Low; you do your own research and analysis High; a fund manager does the research and analysis
Taxes You control capital gains by timing when you sell You can owe capital gains taxes even if you don’t sell your shares

Pros and Cons of Mutual Funds

Pros:

  • Built-in diversification
  • Professional management
  • Attractive returns
  • Low costs
  • Dividend reinvestment

Cons:

  • High expense ratios
  • Sales loads
  • High investment minimums
  • Taxable events
  • Trades once per day

Pros and Cons of Stocks

Pros:

  • Large potential gains
  • Dividends
  • Easy to trade
  • Low costs
  • Tax-efficient

Cons:

  • Large potential losses
  • Low diversification
  • Higher risk
  • Time-consuming
  • Stressful

Which is Right for You?

The decision of whether to invest in stocks or mutual funds depends on your personal investment goals and risk tolerance.

If you want an easy way to diversify your holdings and don’t have the time, interest, or expertise to research companies, pick individual stocks, and manage your portfolio, then mutual funds may be a good option for you.

If you have a higher risk tolerance and want control over your trading decisions, then stocks may be a better choice.

Of course, you don’t have to choose between stocks and mutual funds. Both can be part of a well-diversified investment portfolio.

FAQs

Are mutual funds safe?

All investments carry some degree of risk, but mutual funds are generally considered safer than stocks because they are inherently diversified.

Do mutual funds outperform the stock market?

While mutual funds can outperform the market occasionally, it isn’t easy to achieve over the long run. Most actively managed mutual funds underperform their benchmark index over the long run.

Should I move my stocks to a mutual fund?

You might consider moving money invested in stocks to a mutual fund if you want the convenience and built-in diversification that a mutual fund offers or someone else to make the investment decisions. On the other hand, you might opt for stocks if you’re comfortable with more risk in exchange for higher potential returns.

Which is better for beginners: stocks or mutual funds?

Mutual funds are generally considered a better investment for beginners than stocks because they are more diversified and easier to manage.



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