Simple Guide for Investing in Mutual Funds Vs. Stocks

August 16, 2014 Posted by admin

Mutual Funds or Stocks? It is most common question that comes in mind of investors, especially beginners. They don’t have exact idea where to put their money where they can generate best returns. What can the answer of this most commonly asked question in investment circle? Actually there is not correct answer which can be supported by some strong proof because both options have their advantages and disadvantages. Eventually, it comes down to personal circumstances. Here is a guide that explains how to choose between fund and stocks depending upon personal circumstances.

Let’s first understand main difference between stocks and funds. Stocks are shares of particular companies which investors can buy/sell from/too stock market. Actually shares of companies come from other investors only but stock exchange works as medium between investors. Historically, it is reported that stock market have potential of 11% returns a year. Stocks are likely to pay off your money back if you wait for right time and make good investment decision. However, risk and return goes hand-in-hand. Financial market may fall down because of some certain reasons but it is seen that it often grow back at long run. It simple means that stocks are good for those who are thinking about investment for long term.

Trading process of funds is almost similar to stocks funds but how money of investors is invested in funds is different than stocks. fund managers collect money from number of investors and invest that collective money in different stocks, bonds, or/and other assets.

Selection of these assets depends on research and knowledge of fund manager.

So here is a main difference between stocks and funds:

“When you invest in stocks, you become shareholder of specific company and when you invest money in funds you are actually giving money to professional fund manager to invest wherever he thinks that money can grow faster”.

Selection process

Now, you have idea about stocks as well as funds. Still, which one is better for you is not clear. Three factors are most effective on your decision: Risks, Returns, and expenses.

Risks: When it comes to risks, funds have upper hand. If you don’t won’t to see big ups and downs in your investments then go for funds, simply because of diversification. As told earlier, when you invest in funds, your money goes to different assets, not only one or two stocks. It means that other assets can cover for underperformer. This is the reason why funds are considered as much better option for beginners.

Returns: Most important and interesting one. It is seen in the past that funds always underperform the market. Expert fund managers don’t have answer to this secret but somehow returns in funds are not as high as funds. When many assets are bought using investors’ money, probability is higher that few of them don’t grow as expected and perform badly. That has significant effects on final outcome. Stocks have potential to offer good returns if investors are ready to take little risk and wait for right time.

Expenses: There is no doubt that stocks win the battle here. In funds, three types of costs are applied: Implicit costs, Explicit costs, and hidden. Even if expenses are minimal for funds, they do exceed expenses related to stocks of same amount.

Conclusion: For those who want safety of their money first, fund investment is ideal choice because it has fewer risks compare to stocks though they has low returns. For aggressive investors, who want to grow their money quickly by investing for long term, stocks are ultimate choice.

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