Mutual funds vs. stocks: the eternal confusion for investors

New investors seeking to invest for the future usually are faced by two options- mutual funds and individual stocks. Mutual funds basically represent stock baskets that are managed quite actively courtesy a fund manager’s assistance. Individual stocks can be purchased by anyone looking to deploy funds through his/her preferred brokerage and thereafter, it is the sole responsibility of the person investing to take care of his/her portfolio maintenance. Mutual funds are largely identified as a passive form of investing, while if you want a more active form, individual stocks is the right pick for you. If you want to know what is a mutual fund, it is always advisable to also familiarize yourself with the fundamentals of the stock market.

Most beginners start with mutual funds, as they are automatically diversified, and present investors, with a large variety of options- from sector based funds to foreign indexes. Mutual funds generally hold a number of stocks, with each equity only comprising a small percentage of the portfolio. If you are an investor of the more adventurous kind, your favored choice should be stocks. You can purchase individual stocks directly through any brokerage, with the commission that is payable on the share purchase and the capital gains tax that is payable on sale of shares being the sole charges to be taken care of. Putting in an investment in just one company can be a volatile affair in terms of high rewards or risks. As a general rule of thumb, the more stocks in a portfolio, the less vulnerable it is to volatile market movements.

If you are in a dilemma, you can consult a financial advisor, as it is very crucial to fully understand your investment time frame and also your tolerance limits in terms of risks before committing to stocks and mutual funds. It is widely assumed that mutual fund investments are lesser prone to risks, and thereby, a safer option. This is majorly due to the active handling of professional managers of funds who try and ensure selection of stock portfolios which come with long-term return guarantees.

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