It is important to develop a habit of investing in different avenues such as stocks or mutual funds to gain financial independence. The main difference between stocks and mutual funds is that you make the decisions in stock investing while a financial investment manager invests in a collection of stocks for you in a mutual fund scheme.
In order to learn how to trade stocks or invest in mutual funds, it is important to be aware of the key differences between both options. Here’s the secret of this—understanding how stock investing and mutual funds operate can allow you to weigh the pros and cons of each option and make an informed choice.
Read ahead to gain a detailed list of the differences between mutual funds and stocks.
1. Investment costs
Most mutual funds charge different types of fees such as a load fee or an expense ratio. In certain cases, the expense ratio charged from you can be as high as 2.5-3% of the amount you have invested.
Investing in stocks yourself can involve other types of associated costs such as brokerage account fees or annual maintenance charges. However, if you compare the two costs, you can save significantly if you invest in stocks yourself.
2. Volatility in investments
Mutual funds consist of a diverse portfolio of different securities such as stocks, government bonds and fixed deposits. Even if your scheme invests only in company stocks, they are distributed over different industries to bring in variance in exposure.
On the other hand, direct investment in stocks can often happen in a single company or at most a handful of companies which may suffer stock crashes at the same time. Thus, mutual fund schemes are less vulnerable to volatility as compared to stocks.
3. Return potential
It is a common knowledge that stocks have higher returns than most investment options. In fact, billionaires like Warren Buffet have built their wealth through careful stock investments throughout the years.
In comparison to stocks, mutual fund returns are not as high as stock returns. However, they are still a better option for novice traders owing to the much lesser risk associated with them.
4. Asset class restrictions
When you invest in the stock market directly, you can only spend in one asset i.e. the stocks of a specific company. In contrast, mutual fund schemes can allow you to invest in a diversified portfolio. You get access to different asset classes such as debt mutual funds, hybrid funds or gold funds.
Why does knowing all this matter? Any investments in stock carry a certain amount of risk whether you invest it yourself or through mutual fund schemes. Hence, a thorough research into the benefits and disadvantages of both the avenues is important, especially if you are a novice trader.
You can pick up more trading knowledge and tips if you pursue trading diplomas or short courses. Pick up a suitable course today to begin your journey towards a financially independent future.
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