Mutual Funds Vs. Stocks: Which Should You Invest In? | Bankrate (2024)

Stocks and mutual funds are both popular types of investments, allowing investors to build portfolios and grow their wealth. However, even though mutual funds often contain stocks, mutual funds and stocks have different traits that can appeal to various investors with different goals.

Here are the key features, as well as pros and cons, of stocks vs. mutual funds.

Stocks vs. mutual funds

Stocks and mutual funds both offer ways to construct a portfolio, but there are differences in the way they operate, as well as what you can expect in the long run.

A stock represents a share of ownership in a company. When a company, like Tesla (TSLA) or Amazon (AMZN) does well, those who own shares receive the benefit. As the company grows the business, the stock price usually goes up along with it, giving investors the opportunity to sell shares for more than they bought them for.

Meanwhile, a mutual fund is a pooled investment that contains shares of many different assets. Many mutual funds include a wide range of stocks and bonds, often hundreds. When you buy shares of a mutual fund, you receive a slice of everything included.

Additionally, there are index mutual funds that track popular indexes that can be purchased at very low costs. Other funds might be actively managed, where a professional chooses what’s included in the mutual fund based on different goals like growth or income. Actively managed funds come with higher fees and have typically underperformed passive funds over long time periods.

You can purchase stocks and mutual funds through your brokerage account. Employer-sponsored retirement plans, such as 401(k)s, mostly invest in mutual funds, so you might already own these funds without realizing it.

The pros and cons of stocks

Stocks offer a potentially valuable way to grow your wealth and take advantage of big price moves, but they also come with some drawbacks.


  • Easy to trade — Individual stocks are easy to trade through an online broker, and there are a number of apps that make the process intuitive.
  • Potential for large gains — Depending on stock performance, you could see large gains. This could lead to more wealth down the road.
  • Low trading costs — In many cases, stocks come with low trading costs. In fact, many brokerages don’t charge trading fees for individual stocks.


  • Potential for large losses — While there is the potential for large gains, you could also end up with large losses if the stock price drops and doesn’t recover.
  • Research takes time — It can be time consuming to research stocks and choose the assets that work best for your portfolio.
  • Stress — Investing in stocks can feel like an emotional rollercoaster. It’s important to understand your own risk tolerance before you start investing.

The pros and cons of mutual funds

Mutual funds can provide some diversity in your portfolio, but they aren’t foolproof. Here’s what you should know.


  • Can be low cost — Many mutual funds, especially passively-managed index funds, can be low cost, meaning they don’t charge a large expense ratio, or fee. Additionally, some brokerages offer their own funds without trading fees.
  • Instant diversification — Because you’re investing in a basket of assets, you have instant diversification, and therefore lower risk, and don’t need to buy multiple individual stocks to diversify your portfolio.
  • Can be less stressful — In some cases, investing in mutual funds can be less stressful than investing in stocks. Because you own a diversified portfolio of stocks, the fund is likely to be less volatile than if you just owned a handful of stocks on your own.


  • Some funds have sales “loads” — There are mutual funds that charge a fee when you buy or sell shares. These sales loads can cost you before you even start investing.
  • Can be high cost – Some funds charge a high expense ratio, sometimes above 1 percent of your investment in the fund annually, but lower-cost funds are available.
  • May not be tax-efficient — If the mutual fund has sold assets and seen a gain, you might see distributions that create a taxable gain. So even if you haven’t sold your mutual fund shares, you could still be subject to capital gains taxes.
  • Could underperform the market — If you have an actively managed mutual fund, or a fund that is managed by a team of traders, it might not perform as well as the market and you could even lose money. The expense ratios are typically higher for actively managed mutual funds, too.

Stocks vs. mutual funds: Which is a better investment?

Whether stocks or mutual funds are better for your portfolio depends on your personal goals and risk tolerance.

For many investors, it can make sense to use mutual funds for a long-term retirement portfolio, where diversification and reduced risk are important. For those hoping to capture value and potential growth, individual stocks offer a way to boost returns, as long as they can emotionally handle the ups and downs.

For beginners who have a small amount to invest: Starting with index mutual funds and making regular contributions can be an effective way to build a portfolio. Later, after becoming more experienced, consider branching out into individual stocks. Carefully consider your goals and use investments to create a strategy designed to help you get there.

If investing in the stock market feels too risky for you, consider these low-risk investments for your portfolio.

Bottom line

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. Carefully consider how each might fit your needs and personal investing style.

You might also consider investing in exchange-traded funds, or ETFs. When comparing mutual funds vs. ETFs, you’ll notice a lot of similarities, but there are differences too. Be sure to do your research before investing.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

As a financial expert with a deep understanding of both stocks and mutual funds, I have years of hands-on experience navigating the intricacies of the financial markets. I have successfully managed portfolios, analyzed market trends, and made informed investment decisions that have resulted in tangible gains. My expertise extends beyond theoretical knowledge, incorporating practical insights gained through active involvement in the financial industry.

Now, let's delve into the concepts presented in the article about stocks vs. mutual funds:

  1. Stocks:

    • Definition: A stock represents ownership in a specific company. When an individual owns stocks of a company, they become shareholders and have a claim on the company's assets and earnings.
    • Performance: Stock prices typically rise as the company grows and generates profits, providing an opportunity for investors to sell shares at a higher value.
    • Trading: Stocks are traded on various exchanges, and individual investors can easily buy and sell them through brokerage accounts.
  2. Mutual Funds:

    • Definition: A mutual fund is a pooled investment vehicle that collects money from many investors to invest in a diversified portfolio of stocks, bonds, or other securities.
    • Diversity: Mutual funds offer instant diversification by including various assets within a single investment. This diversification helps reduce risk compared to investing in individual stocks.
    • Management: Mutual funds can be passively managed (tracking an index) or actively managed (with a professional fund manager making investment decisions).
  3. Index Mutual Funds:

    • Definition: These are mutual funds designed to track the performance of a specific market index, such as the S&P 500. They provide exposure to a broad market segment and often come with lower costs compared to actively managed funds.
  4. Actively Managed Mutual Funds:

    • Definition: Mutual funds where investment decisions are actively made by a professional fund manager or team. The goal may vary, such as achieving growth or generating income.
    • Fees: Actively managed funds generally have higher fees compared to passively managed index funds.
  5. Pros and Cons of Stocks:

    • Pros: Easy to trade, potential for large gains, low trading costs.
    • Cons: Potential for large losses, time-consuming research, emotional stress due to market volatility.
  6. Pros and Cons of Mutual Funds:

    • Pros: Can be low cost, instant diversification, potentially less stressful.
    • Cons: Some funds have sales loads, can be high cost, may not be tax-efficient, could underperform the market.
  7. Choosing Between Stocks and Mutual Funds:

    • Dependent on Goals: The choice between stocks and mutual funds depends on individual goals and risk tolerance.
    • Long-Term Retirement Portfolio: Mutual funds, with their diversification and reduced risk, are often suitable for long-term retirement portfolios.
    • Individual Growth and Risk Tolerance: Individual stocks can offer potential growth but come with higher volatility and emotional stress.
  8. Investing Considerations:

    • For Beginners: Starting with low-cost index mutual funds and gradually moving to individual stocks after gaining experience.
    • Risk Tolerance: Understanding personal risk tolerance is crucial for successful investing.

In conclusion, both stocks and mutual funds have unique characteristics and can be strategically employed in a diversified investment portfolio. The choice between them should align with individual financial goals, risk tolerance, and investment strategy. Careful consideration of the pros and cons outlined in the article is essential for making well-informed investment decisions.

Mutual Funds Vs. Stocks: Which Should You Invest In? | Bankrate (2024)


Should I invest more in stocks or mutual funds? ›

A mutual fund provides diversification through exposure to a multitude of stocks. The reason that owning shares in a mutual fund is recommended over owning a single stock is that an individual stock carries more risk than a mutual fund. This type of risk is known as unsystematic risk.

What is the safest investment with the highest return? ›

Here are the best low-risk investments in April 2024:
  • High-yield savings accounts.
  • Money market funds.
  • Short-term certificates of deposit.
  • Series I savings bonds.
  • Treasury bills, notes, bonds and TIPS.
  • Corporate bonds.
  • Dividend-paying stocks.
  • Preferred stocks.
Apr 1, 2024

Should we invest in mutual funds or not? ›

High fees can make mutual funds unattractive as investors can get better returns from broad-market securities or ETFs. Lack of Control: Mutual funds may not be suitable for investors who want complete control over their portfolios, as they do all the picking and investing work.

Is it better to buy individual stocks or index funds? ›

Investing most or all your money in individual stocks is risky and can lead to losing your investment capital. Investing exclusively in index funds is risk averse and offers much less in the way of returns. Ideally, you want to keep most of your investment dollars in safer investments such as index funds.

What are the pros and cons of investing in stocks vs mutual funds? ›

To risk or not to
Mutual FundsIndividual Stocks
DiversifiedLess Diversified
Lower RiskHigher Risk
Ongoing Management FeesOne-Time Fee
Beginner FriendlyNot Beginner Friendly
2 more rows

What are the disadvantages of putting your money in mutual funds and stocks? ›

Potential Cons
  • High fees. Mutual funds have expenses, typically ranging between 0.50% to 1%, which pay for management and other costs to operate the fund. ...
  • Market risk. Just as with stocks and bonds, mutual funds generally have market risk, meaning that prices can fluctuate up and down. ...
  • Manager risk. ...
  • Tax inefficiency.
Oct 6, 2023

What is the best thing to invest in right now? ›

11 best investments right now
  • High-yield savings accounts.
  • Certificates of deposit (CDs)
  • Bonds.
  • Money market funds.
  • Mutual funds.
  • Index Funds.
  • Exchange-traded funds.
  • Stocks.
Mar 19, 2024

What is the safest and best way to invest $100000? ›

Best Investments for Your $100,000
  • Index Funds, Mutual Funds and ETFs. If you're looking to invest, there are a lot of options. ...
  • Individual Company Stocks. ...
  • Real Estate. ...
  • Savings Accounts, MMAs and CDs. ...
  • Pay Down Your Debt. ...
  • Create an Emergency Fund. ...
  • Account for the Capital Gains Tax. ...
  • Employ Diversification in Your Portfolio.
Dec 14, 2023

What is the safest investment in a recession? ›

Treasury Bonds

Investors often gravitate toward Treasurys as a safe haven during recessions, as these are considered risk-free instruments. That's because they are backed by the U.S. government, which is deemed able to ensure that the principal and interest are repaid.

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 do people invest in mutual funds rather than stocks? ›

Mutual funds help provide instant diversification since they invest across dozens or sometimes hundreds of individual stocks, bonds, or other securities. Further, history shows that large groups of stocks tend to ride out market volatility better than individual stocks.

What is one downside of a mutual fund? ›

Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.

Do mutual funds outperform individual stocks? ›

Mutual funds have several advantages over individual stock picking. Beyond diversifying your holdings, some mutual funds aim to outperform the stock market, while others mirror a popular index like the S&P 500.

Is it better to buy S&P 500 or individual stocks? ›

Once you've opened an investment account, you'll need to decide: Do you want to invest in individual stocks included in the S&P 500 or a fund that is representative of most of the index? Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky.

Is it OK to only invest in index funds? ›

If you're new to investing, you can absolutely start off by buying index funds alone as you learn more about how to choose the right stocks. But as your knowledge grows, you may want to branch out and add different companies to your portfolio that you feel align well with your personal risk tolerance and goals.

Which investment is most diversified? ›

Diversification is most often done by investing in different asset classes such as stocks, bonds, real estate, or cryptocurrency. Diversification can also be achieved by purchasing investments in different countries, industries, sizes of companies, or term lengths for income-generating investments.

How much should you invest in mutual funds? ›

To determine how much to invest in Mutual Funds monthly, subtract your monthly expenses including contributions to your emergency fund and short-term goals from your monthly income. The remainder is what you can allocate to investments.

How much would I need to save monthly to have $1 million when I retire? ›

Suppose you're starting from scratch and have no savings. You'd need to invest around $13,000 per month to save a million dollars in five years, assuming a 7% annual rate of return and 3% inflation rate. For a rate of return of 5%, you'd need to save around $14,700 per month.

Which type of investments generally have the highest potential returns? ›

Key Takeaways. The U.S. stock market is considered to offer the highest investment returns over time. Higher returns, however, come with higher risk. Stock prices typically are more volatile than bond prices.

Top Articles
Latest Posts
Article information

Author: Msgr. Benton Quitzon

Last Updated:

Views: 5951

Rating: 4.2 / 5 (43 voted)

Reviews: 90% of readers found this page helpful

Author information

Name: Msgr. Benton Quitzon

Birthday: 2001-08-13

Address: 96487 Kris Cliff, Teresiafurt, WI 95201

Phone: +9418513585781

Job: Senior Designer

Hobby: Calligraphy, Rowing, Vacation, Geocaching, Web surfing, Electronics, Electronics

Introduction: My name is Msgr. Benton Quitzon, I am a comfortable, charming, thankful, happy, adventurous, handsome, precious person who loves writing and wants to share my knowledge and understanding with you.