» Stock Investing Basics » Mutual Funds vs Individual Stocks

Mutual Funds vs. Individual Stocks

Many investors face the dilemma of whether to select mutual funds or stocks as their investment tool. In order to decide which tactic best fits your needs, you should be well grounded in the pros and cons of each of them. Many investors solve their personal dilemma of stocks vs. mutual funds by investing in both.

Stocks Compared to Mutual Funds

  • Fees

    Most mutual funds require you to pay some kind of a fee, which further reduces the money you have available for investment. Even though these fees are of a small amount, mutual funds are famous for their compounding capabilities. So, the latter may lead to a high impact on your returns. However, individual stock requires you to pay a one-time brokerage fee. No ongoing fees are incurred.

  • Diversification

    A great advantage of mutual funds compared to stocks is their major characteristic of diversification. This means that mutual funds invest in many different stocks and in this way balance the risk you may encounter. Additionally, the fund managers may decide to invest in companies from different sizes and industries. This is done in order to balance the downturns in a particular investment with the upturn in another.

  • Upside Potential

    Diversification may be beneficial in bad times, but at the same time it may have a holding down effect on the assets that are part of the portfolio. Diversification is not a characteristic of individual stocks and as a result the level of upside potential of stocks is far higher compared to mutual funds.

  • Tracking of Investments

    When you purchase stocks of a company you become one of its owners. Thus, you get to know the company and its directions of development. On the other hand, mutual funds due to their diversification capabilities invest in many companies, which makes the tracking of the investments more difficult.

  • Selection

    The mutual fund real is extremely vast offering you a wide variety to select from. Mutual funds vary from those that cover the whole market to those that cover only a small segment of the market. Additionally, the industry focus of every fund may differ.

  • Financial Management

    When you purchase a mutual fund, you automatically enjoy the services of a team of professional financial managers. The latter are most of the time experienced investment pickers. They execute the selection and tracking services of the different investments instead of you.

  • Facilities

    Another benefit provided to mutual fund investors is the convenience which they offer. They alleviate most of the record keeping load and also assist you in your tax management. Many mutual funds provide additional services such as check writing privileges, which are covered from the investors' money market account. There are many busy investors who park their money in mutual funds because of the many services offered.

Mutual Funds plus Individual Stocks

You don't have to narrow your choice only to one of them. You can select both of them as part of your investment portfolio. Mutual funds are less risky and extremely suitable for retirement plans but don't overlook individual stocks since they may provide you with high rewards.

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