Mutual Funds vs. Stocks: Which Should You Choose?

Understanding Mutual Funds and Stocks

Mutual funds and stocks are two different investment strategies. Both can be used for wealth building. 

Each has its own unique characteristics, benefits, and risks. This guide explains how to invest using mutual funds or stocks and which one is right for you.

What is a Mutual Fund?

It is a professionally managed investment vehicle. A mutual fund pools money from lots of investors to buy different securities. 

These securities can include stocks, bonds, commodities, and other financial assets. Usually, mutual funds are focused on one specific area or market. 

A mutual fund is usually the best option if you’re a beginner, looking to make your money work for you.

Mutual funds have four main features, which include professional management, diversification, accessibility, and liquidity. 

Types of Mutual Funds

• Equity Funds: These funds invest mainly in stocks
• Bond Funds: Bond mutual funds invest in fixed-income securities
• Money Market Funds: Invest in short-term, low-risk instruments
• Balanced Funds: Combine stocks and bonds in a single portfolio

What Are Stocks?

Stocks are shares that represent ownership in a specific company. 

When you buy stocks, you’re essentially buying a fractional stake in a particular company. 

Stocks often give you access to dividends and voting rights. You’ll also benefit from any capital appreciation. 

If you’re curious about how much of your portfolio should consist of stocks, our guide on how much in stocks can help.

The four main features of stocks include direct ownership, the potential for higher returns, higher risk, and active management. 

Types of Stocks

• Large-Cap Stocks: Shares of established, large companies like Apple or Microsoft
• Mid-Cap Stocks: Shares of medium-sized companies
• Small-Cap Stocks: Shares of smaller, potentially growing companies
• International Stocks: Shares of companies outside the investor’s home country
• Dividend Stocks: A company that shares profits with investors. 

Key Differences Between Mutual Funds and Stocks

We’ve already explained what mutual funds and stocks are, now we’ll explore the main differences between the two. 

Understanding the fundamental features can help you decide which one is right for you. 

Investment Structure

The main difference between stocks and mutual funds is the structure of each. 

Mutual funds pool money from multiple investors and buy lots of securities. Stocks are direct ownership of a company. 

When you invest in a mutual fund, you’ll gain broad exposure to a specific market or investment category. When investing in stocks, you have a stake in a specific business. 

For those seeking smaller-scale investment options, microinvesting could be a good fit.

Risk and Returns

Both stocks and mutual funds are risky and offer the opportunity to generate returns. However, stocks are considerably riskier while offering more upside potential. 

Mutual funds invest in multiple securities, which means they can balance market volatility. 

For example, a single investment is unlikely to hamper a fund’s performance (unless it is heavily weighted). 

Stocks have more concentrated risk as you’re investing in a single company. This means the value of your investment will rise and fall in line with the performance of the company. 

If it does well, you’ll make more money; however, if it performs poorly, your investment will likely suffer. 

If you’re navigating uncertain markets, check out our guide on how to make money in a bear market for tips.

Stocks vs. Mutual Funds: Which is better?

Both stocks and mutual funds can make good investments, but which is better depends on various factors. 

When it comes to deciding which is better, you’ll need to consider your investment goals, risk tolerance, and financial circumstances. Let’s take a closer look:

Investment Suitability

Your choice will depend on your goals, risk tolerance, and experience. For first-time investors, we recommend reading top tips for first-time investors to build confidence.

The table below explains the types of investors best suited to either stocks or mutual funds: 

Final Word

Both stocks and mutual funds have unique advantages and drawbacks, so picking the best one usually requires a bit of evaluation. 

If you’re a new investor with little time to invest and don’t want to take big risks, then investing in mutual funds is the best option. 

Investors looking for bigger returns, more activity, and are willing to take on more risk should consider stocks. 

While both vehicles individually offer benefits, it’s often a good approach to combine the two and build a balanced, healthy portfolio with both stocks and mutual funds. 

If you’re wondering how to allocate funds effectively, consider exploring our guide on how to find portfolio beta.

Frequently Asked Questions