If you've been investing for a while, you've probably been exposed to both stocks and mutual funds. And, at times, you may have wondered which of these investments is more appropriate. Does one offer more advantages than the other? If so, are you putting your money in the right place?
There's no one "right" answer for everyone. In truth, both mutual funds and stocks offer distinct benefits. Let's take a quick look at some of them:
Advantages of Mutual Funds
• Diversification — When you buy a mutual fund, you automatically achieve a degree of diversification, because each fund may invest in dozens, or even hundreds, of different securities — stocks, bonds, Treasury bills, money market accounts, etc. This diversification can help lessen the impact of downturns that affect one particular type of financial asset.
• Professional management — Mutual funds are run by professional money managers who possess years of experience in analyzing the markets and selecting the mix of securities needed to achieve a fund's particular goals — growth, income, growth and income, etc. Of course, there's no guarantee that your fund's managers will live up to your expectations. Yet, there's no denying the fact that, just by investing in a mutual fund, you are putting a great deal of expertise to work on your behalf.
• Affordability — It doesn't take much money to invest in mutual funds. In fact, you can set up a bank authorization to automatically invest as little as $25 per month in some funds. Thus, it's easy to invest in a variety of mutual funds — which will further diversify your portfolio.
Advantages of Stocks
• Potential for bigger gains — If you own an individual stock, and it doubles in price, then you've made a 100 percent profit. But if your mutual fund owns that same stock, the overall value of the fund may only increase slightly, if at all. However, the price of your single stock also could drop by half. If this same stock were in a mutual fund, the drop would not result in such a drastic decline in the fund's net asset value.
•‑Lower investment costs — When you buy a mutual fund, you may have to pay a sales charge — also known as a "load" — along with operating expenses, which include management fees and 12b-1 fees (to cover marketing costs). Together, these charges can reduce your overall return. But when you buy a stock, you typically pay only a one-time commission — and the same is true when you sell the stock. Consequently, more of your money is working for you.
• Greater control over taxes — Mutual fund managers constantly buy and sell securities to boost the performance of their funds. Although you have no control over these trades, they may have tax consequences for you, in the form of capital gains. But when you buy a stock, you're also the one who will decide when to sell it. Therefore, you'll control when you pay taxes on your gains.
As with any type of investment, stocks and mutual funds carry risks, including the potential loss of principal. It's important to understand these risks, as well as the potential benefits, before you invest. Your investment professional can help you evaluate your situation to determine if mutual funds and stocks are suitable for you. Ultimately, you may find that a combination of funds and stocks will help you meet your long-term goals.