As a new investor, you will hear the terms mutual funds, stocks, bonds, etc. But you may be wondering what's the difference. The perpetual fight between mutual funds vs stocks plagues all investors. So, let's understand the pros and cons of both and which is a better investment.

Mutual Funds vs Stocks - Table of Contents

What are Mutual Funds?

Mutual funds are pooled investments that contain multiple stocks and other assets within that single fund. An experienced Fund Manager manages this pool. Any income or gains generated from these collective investments is distributed among investors post the deduction of applicable expenses. 

What are the Pros and Cons of Mutual Funds? 

Mutual funds are known to offer stability in a portfolio but are not foolproof. 

Pros of Mutual Funds:

• Low cost: Most mutual funds are low cost. This means that they do not have large fees or expense ratios. 
• Instantly diverse: As you invest in multiple assets, funds are instantly diversified, and lower risks are involved. 
• Less stressful: Investment in mutual funds is less stressful than in stocks. This is because of the diverse portfolio where funds are less likely to be volatile.

Cons of Mutual Funds: 

• Sales costs: Some mutual funds have a hidden cost when you buy or sell them. 
• Can be higher costs: Some funds charge higher expense ratios. 
• Might not be tax-efficient: Once the mutual fund has sold assets and you see a gain, you might get a taxable gain. But, even if you have not sold the shares, you might still be subject to capital gains. 
• Can underperform the market: When you have actively managed mutual funds, it might not work either, and you might even lose money. 

What are Stocks?

A stock is the ownership of shares in a corporation or company. When companies such as Amazon and Tesla do well, those holding stocks benefit. As the company grows, the stock prices for that company go up. This gives investors an added income to sell the shares for more than they bought. 

What are the Pros and Cons of Stocks?

Stocks provide an invaluable way to grow wealth and take advantage of big-cost moves.

Pros of Stocks: 

• Trade easy: Stocks are easy to trade through a broker or through several apps online. 
• Higher gains: You can get better gains depending on the stock's performance. This leads to more wealth. 
• Lower trading costs: In some cases, stocks have lower trading costs. In this case, many brokerage firms overlook the trading fee for individual stocks. 

Cons of Stocks: 

• Chance of larger losses: Even though there is a potential for larger gains, you can also end up with larger losses when the stock prices drop and do not recover. 
• Research time: It is quite time-consuming to research stocks and choose assets that work the best. 
• Stress levels: Investment in stocks feels like an emotional rollercoaster, and the added stress can make sleeping difficult at night.

Mutual Funds vs Stocks - Differences and Comparison

When it comes to the fight between mutual funds vs stocks, the key differences are: 

1. Mutual funds are a pool of money from multiple small investors invested in a portfolio of multiple assets. This can include aspects like money market instruments, debt or equity. At the same time, a stock is a collection of shares owned by individual investors that indicates ownership of assets in the company. 

2. The performance of mutual funds depends on macroeconomic factors, where the fund manager's skills and security pool helps maintain regular and stable returns. Stock performance depends on the company's performance. 

3. The rules and regulations in mutual funds are stated as per the Red Herring Prospectus. These rules are meant to beat the returns the market provides without impacting the invested principal amount. On the other hand, a Board of Directors determines stock strategies. These can change based on the market and the director's skills. 

4. Mutual funds provide fractional ownership in the overall basket, whereas stocks represent ownership stakes to investors. 

5. Mutual funds are managed by fund managers, whereas investors are individually responsible for managing their own stocks. 

6. The risk components in mutual funds provide diversification benefits; this offers a robust earning opportunity in case a single company fails. In contrast, the risk component in stocks is larger as it is based on a single company.

7. Mutual funds are traded only once a day when the NAV is finalized, whereas stock trading takes place at all times during the day. 

8. Value of a mutual fund is calculated by arriving at NAV - the total value of Net Asset Expenses. But, the total cost of shares is based on an individual share price multiplied by the total number of shares. 

9. Mutual funds provide regular dividends to investors, with a periodic statement on the performance of the funds. On the other hand, stocks give regular returns in the form of dividends earned and vary depending on the firm's performance. 

10. For mutual funds, the fund manager is not directly responsible for the funds' outcome. In contrast, the stockholder is responsible for returns in the stock market as the investor is directly managed by the same. 

Mutual Funds vs Stocks - Which is the better investment?

For long-term investors, mutual funds are the best option as it reduces any overall risk and helps create a retirement plan. These are also perfect for beginner investors who want to enter the stock market but do not know much about it. 

For investors who want to capture a company's potential growth, individual stocks provide the option for bigger returns. Investors can go this route to stomach more risks and be confident in analyzing individual stocks. 

When investing in mutual funds vs stocks finally comes down to investment goals and risk tolerances. The main difference between these is the number of funds, and diversity is always considered a solid investment. 

Conclusion

Investing in mutual funds vs stocks is an entirely personal decision, and the investor should understand the pros and cons of each. Both these options are easily available for investors with the limited requirement. But stocks offer the option to invest directly in the stock market, but one needs to track the performance to decide the future course. 

On the other side, mutual funds are based on diversification. It helps get the risks to get spread out, and professionals can manage these funds within the ambit of strategies that are committed. So, investors are relieved of the idea of constantly monitoring the investment.