Mutual Funds vs. Stocks: What’s the Difference? - NerdWallet (2024)

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Stock should make up the bulk of most portfolios geared toward a long-term goal like retirement. But that doesn't mean you have to buy and trade individual stocks — you can also gain that exposure through stock mutual funds.


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Mutual funds vs. stocks

The biggest difference between mutual funds and stocks is that stocks are an investment in a single company, whereas mutual funds have many investments — meaning potentially hundreds of stocks — in a single fund.

You can read more about each strategy below, but we'll give a spoiler for those who don't want to dig into the details: Many investors will prefer to form the bulk of their portfolios with mutual funds (specifically, low-cost index funds and exchange-traded funds, also known as ETFs, which we explain below). Once you're set there, you might choose dedicate 5% or 10% of your portfolio to stock trading for a little thrill.

» Learn more: What are mutual funds and how do they make money?

ETFs vs. stocks: A quick breakdown

An ETF is a type of mutual fund with all the same benefits (think diversification and reduced risk), yet it has one major difference: It can be traded throughout the day just like individual stock. Moreover, much like index funds, passively managed ETFs often have very low expense ratios compared with actively managed mutual funds.

Investing in ETFs can deliver the benefits of mutual funds without the added cost of active management, while offering the liquidity you’d get from investing in individual stocks. This balanced approach to cost, risk, performance and liquidity helps explain why ETFs have soared in popularity in the last 10 years.

So what’s the catch? Like index funds, ETFs aren’t designed to beat the market. They’re designed to track it, meaning when the underlying index falls, your ETF will too. To beat the market, you’ll need to invest in individual stocks or actively managed funds that will outperform in the future — a feat that usually requires diligent research and a bit of luck. But even aided by the best expertise, these investments rarely beat the market over the long term.

Stock mutual funds


  • Easy diversification, as each fund owns small pieces of many investments.

  • Professional management available via actively managed funds.

  • Investors can typically avoid trade costs.

  • Many index funds and ETFs have low ongoing fees.

  • Convenient and less time-intensive for the investor.


  • Annual expense ratios.

  • Many funds have investment minimums of $1,000 or more.

  • Typically trade only once per day, after the market closes. However, ETFs trade on an exchange like stocks.

  • Can be less tax-efficient.

The details

Stock mutual funds (also known as equity mutual funds) are like a middleman between you and stocks: They pool investor money and invest it in a number of different companies. Rather than picking and choosing individual stocks yourself to build a portfolio, you can buy many stocks in a single transaction through a mutual fund.

That makes mutual funds ideal for investors who don’t want to spend a lot of time researching and managing a portfolio of individual stocks — a mutual fund does that work for you. A simple investment portfolio might contain just a few mutual funds, which could be a combination of actively managed funds, index funds or ETFs.

» Need guidance? Check out these model mutual fund portfolios

We’re big fans of index funds and ETFs over actively managed mutual funds, and not only because actively managed funds rarely beat the market. They also come with higher fees to pay for professional management of your funds, and these added costs can significantly eat into your returns over the long run. Tracking a benchmark with an index fund or ETF provides an excellent shot at strong long-term investment returns, along with diversification and lower fees.

Keep in mind that mutual funds aren't totally hands-off: You still have to stay on top of your portfolio — you may want to rebalance periodically, check fees, and ensure that you're still invested at the appropriate level of risk.

If you don't want to do that, you might be a good candidate for a robo-advisor, an online portfolio management service that invests for its clients and automatically rebalances portfolios as needed. These companies generally invest in ETFs. (Here's more about robo-advisors, what they do, and our picks for the top companies.)

» Want more options? See our picks for the best brokers for funds.

Mutual Funds vs. Stocks: What’s the Difference? - NerdWallet (4)

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Individual stocks


  • Highly liquid.

  • No annual or ongoing fees.

  • Complete control over the companies you choose to invest in.

  • Tax-efficient, as you can control capital gains by timing when you buy or sell.


  • Carry more risk than mutual funds.

  • Must hold many individual stocks to adequately diversify.

  • Time-intensive, as investors must research and follow each individual stock in their portfolio.

  • You'll generally pay a commission to buy or sell.

» Ready to start? See our rankings of the best online stock brokers

The details

Could you do much of the work of a mutual fund, index fund or ETF yourself, by buying stocks outright? Sure, if you want to quit your job and start day trading.

Jokes aside, it is an ambitious and time-consuming undertaking to build a portfolio out of individual stocks. Each stock requires research; you'll want to dig into the company you're considering investing in, as well as its management, industry, financials and quarterly reports. (Here's more on how to do that research.) You then need to put a number of these individual stocks together into a portfolio that manages risk by diversifying across industries, company size and geographic region.

Still, some investors like the thrill of that chase. Should investing be thrilling? Boring is probably better. But if you get a rush from attempting to pick a winner, how about a compromise: Set aside a small portion of your funds for active stock trading (and brush up on our how-to guide), while investing the rest in a diversified portfolio of index funds or ETFs.

» Learn more: How to invest in stocks

As an avid investor with a comprehensive understanding of financial markets and investment strategies, I'm here to delve into the concepts presented in the article. My expertise is grounded in practical experience and an in-depth knowledge of the intricacies of investing. Let's break down the key concepts discussed:

  1. Stocks and Mutual Funds:

    • Stocks: These represent ownership in a single company. Investors buy and trade individual stocks, and the article emphasizes that stocks can be a part of a diversified portfolio, contributing 5% to 10% for a bit of excitement.
    • Mutual Funds: Mutual funds, on the other hand, pool money from investors to invest in a variety of companies. They offer diversification, professional management, and the ability to avoid individual stock trading. The article recommends forming the bulk of portfolios with mutual funds.
  2. ETFs (Exchange-Traded Funds) vs. Stocks:

    • ETFs: These are a type of mutual fund that can be traded throughout the day like individual stocks. They provide diversification, reduced risk, and often have low expense ratios, similar to index funds. However, like index funds, they are designed to track the market rather than beat it.
  3. Pros and Cons of Stock Mutual Funds:

    • Pros:

      • Easy diversification.
      • Professional management via actively managed funds.
      • Avoidance of trade costs in many cases.
      • Convenient and less time-intensive for investors.
    • Cons:

      • Annual expense ratios.
      • Investment minimums in some funds.
      • Typically trade only once per day.
      • Can be less tax-efficient.
  4. Individual Stocks:

    • Pros:

      • Highly liquid.
      • No annual or ongoing fees.
      • Complete control over chosen investments.
      • Tax-efficient, with control over capital gains timing.
    • Cons:

      • Higher risk compared to mutual funds.
      • Requires holding many individual stocks for proper diversification.
      • Time-intensive, demanding extensive research.
      • Commission fees for buying or selling.
  5. Building a Portfolio:

    • Stock Mutual Funds (Equity Mutual Funds): Act as a middleman, allowing investors to buy many stocks in a single transaction. Ideal for those not wanting to actively manage individual stocks.
    • Individual Stocks: Ambitious and time-consuming undertaking, requiring in-depth research into each chosen company.
  6. Robo-Advisors:

    • For Mutual Funds: The article mentions robo-advisors as an option for investors not wanting to actively manage their portfolios. These services typically invest in ETFs.
  7. Investing Approach:

    • Index Funds and ETFs: Recommended over actively managed mutual funds due to their lower fees and the ability to track market benchmarks effectively.
  8. Active Stock Trading:

    • A Small Portion: Suggested for those who enjoy the thrill of picking individual stocks. The article proposes a compromise of dedicating a small portion of funds to active stock trading while investing the rest in diversified index funds or ETFs.

In conclusion, the article advocates for a balanced approach to investing, incorporating mutual funds, index funds, ETFs, and a cautious allocation to individual stocks based on an investor's risk tolerance and preferences.

Mutual Funds vs. Stocks: What’s the Difference? - NerdWallet (2024)


What is the difference between mutual funds and stocks? ›

Mutual funds are investment vehicles that pool money from multiple investors to buy a diversified portfolio, while stocks represent ownership in a specific company and their value fluctuates based on the company's performance and market conditions.

Why do people choose mutual funds over stocks? ›

Advantages of Mutual Funds. There are several specific reasons investors turn to mutual funds instead of managing their own portfolio directly. The primary reasons why an individual may choose to buy mutual funds instead of individual stocks are diversification, convenience, and lower costs.

What are 3 advantages and 3 disadvantages of investing in mutual funds rather than stocks or bonds directly? ›

Some of the advantages of mutual funds include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing, while disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.

What advantages do the mutual funds offer compared to the company stock explain? ›

Buying stocks means buying an ownership share of a single corporation, representing a very specific asset. A mutual fund, on the other hand, combines many different assets—including individual stocks—into one grouping. They tend to be less volatile and risky than individual stocks. Another key difference is fees.

What is the biggest difference between stocks and mutual funds? ›

Stocks represent shares in individual companies while mutual funds can include hundreds — or even thousands — of stocks, bonds or other assets. You don't have to choose one or the other, though. Mutual funds and stocks can both be used in a portfolio to help you grow your wealth and meet your financial goals.

What is mutual fund in simple words? ›

A mutual fund is a pool of money managed by a professional Fund Manager. It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.

Are mutual funds safe for long term? ›

Managed by Experts: Unlike standalone securities, mutual funds are managed by experts, so they are considered safe and secure. 3. Diversity: Based on the theme and category of mutual funds, investors get the exposure to a large number of stocks across the market capitalisation spectrum.

Should I invest all my money in mutual funds? ›

Given how high the risk is with these mutual funds, it is best to limit yourself to a limited number of small cap mutual funds. Also, avoid putting in a great percentage of your total mutual fund investment in small cap mutual funds. Debt Funds: Ideally 1, but 2 is also good.

Why are mutual funds considered a high risk form of investment? ›

Volatility: High-risk mutual funds are more volatile than other types of mutual funds. The value of your investment may fluctuate significantly over time.

What is the dark side of mutual funds? ›

However, mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high expense ratios charged by the fund, various hidden front-end, and back-end load charges, lack of control over investment decisions, and diluted returns.

Why people don t invest in mutual fund? ›

As the funds are invested in market instruments, they carry certain stock market risks like volatility, fall in share prices etc., which deters us from investing in mutual funds. As we don't want to lose money, we often let it stagnate in our savings accounts.

Why mutual funds are bad? ›

High annual expense ratio, high load charges or high fees paid when an investor buys or sells shares are not good signs. Mutual funds are also not a good option for people who want to exercise total control over their holdings. This is because the funds are managed by fund managers.

What is the best time to invest in mutual funds? ›

There is no better time to start investing. It is very difficult to time the markets and although the markets are due for a correction, it would not be wise to wait further. Also, when it comes to SIPs, there is not much merit in timing the markets. We would suggest you invest in different mutual fund categories.

Which mutual fund is best to invest in 2024? ›

Small Cap Funds: 2024 Performance
  • Quant Small Cap Fund. 15.59% 9.06%
  • Bandhan Small Cap Fund. 10.45% 8.44%
  • ITI Small Cap Fund. 10.03% 9.06%
  • Mahindra Manulife Small Cap Fund. 9.66% 8.44%
  • SBI Small Cap Fund. 8.44% 8.44%
  • Motilal Oswal Small Cap Fund. 8.00% 9.06%
  • Baroda BNP Paribas Small Cap Fund. 7.51% ...
  • LIC MF Small Cap Fund. 7.42%
21 hours ago

Should I sell mutual funds when market is high? ›

Interrupting or ceasing investments during market peaks or due to apprehensions about a correction is counterproductive to reaching your financial objectives. Bhatt adds, “Instead of stopping completely, you could choose to reduce your SIP or lump-sum amount until market conditions seem less frothy.

How does a mutual fund make money? ›

Mutual funds make money by charging investors a percentage of assets under management and may also charge a sales commission (load) upon fund purchase or redemption. Fund fees, called the expense ratio, can range from close to 0% to more than 2% depending on the fund's operating costs and investment style.

How long do you have to hold mutual funds? ›

For most mutual funds categories, there is no prescribed holding period, however factors such as exit load, capital gains tax, performance, liquidity and financial goals should be taken into consideration when deciding the ideal period to stay invested in a scheme.

Is it better to invest in equity or mutual funds? ›

Equity shares are more static, while mutual funds are dynamic and include various types. Opportunities of portfolio diversification are higher with mutual funds, but equity shares can generate higher returns. Besides ELSS mutual funds, you have to pay taxes on both equity shares and mutual funds.

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