Mutual Funds vs. Stocks: Differences & What to Invest In (2024)

If you're new to investing, you might wonder whether stocks or mutual funds are the best investments for beginners. When you invest in a stock, you buy a share of a single company, whereas a mutual fund is a collection of stocks, bonds, or other securities.

Mutual funds are generally considered a safer investment than stocks because they offer built-in diversification—something that helps mitigate the risk and volatility in your portfolio. On the other hand, some stocks may offer higher earnings potential, which can help you grow your wealth and reach your financial goals faster. However, betting on a single stock is far riskier than investing in a well-diversified basket of assets.

Ultimately, deciding between stocks versus mutual funds comes down to your investment goals and risk tolerance. Here are the key features of stocks and mutual funds to help you decide which investment may be right for you.

Mutual funds vs. stocks: key differences

StockMutual fund

What it is

A share in one company

A portfolio of investments

Investing style



Who makes decisions


Professional fund manager


Commissions when you buy and sell; no ongoing fees after purchase

Annual expense ratios; may have sales loads, redemption fees, and transaction fees


Only as part of a well-diversified portfolio

Built-in diversification in a single investment


Higher; performance is tied to a single company

Lower; risk mitigated through diversification


High; you choose the stocks you want

Low; a fund manager chooses the investments

How it trades

During regular market hours

Once per day

Beginner friendliness

Low; you do your own research and analysis

High; a fund manager does the research and analysis


You control capital gains by timing when you sell

You can owe capital gains taxes even if you don’t sell your shares

Pros and cons of mutual funds

Mutual funds can bring instant diversification and stability to your portfolio, but they may not be suitable for every investor. Here are the benefits and drawbacks to consider.


  • Built-in diversification: A single mutual fund holds a broader range of investments than most individuals could afford to buy.
  • Professional management: A professional fund manager (or team of pros) researches the companies, chooses the investments, and monitors the portfolio's performance.
  • Attractive returns: High-performing, large-company stock mutual funds have produced returns of up to 12.86% over the last 20 years, according to Nasdaq.
  • Low costs: Many mutual funds have low expense ratios, and most large brokers offer a list of no-transaction-fee funds with zero trading costs.
  • Dividend reinvestment: Dividends can be reinvested automatically, so you can enjoy the benefits of compounding.


  • High expense ratios: Expense ratios can be as high as 1% or more of your investment each year, significantly eroding your returns over time.
  • Sales loads: Front-end and back-end sales loads (fees you pay when you buy and sell mutual fund shares) can be as much as 8.5% of the amount you invest, putting you in the red from the get-go.
  • High investment minimums: Many mutual funds require an initial investment of $500 to $5,000 or more, making them impractical for smaller investors.
  • Taxable events: If the fund realizes a gain from selling assets, you could owe capital gains taxes even if you haven't sold your shares.
  • Trades once per day: Unlike stocks, mutual funds trade once daily after the markets close at 4 p.m. Eastern Time.

Pros and cons of stocks

Stocks can offer larger potential returns than mutual funds and are easier to trade, but there are risks and drawbacks to consider.


  • Large potential gains: Stocks can have higher potential returns than other types of investments.
  • Dividends: Some stocks pay dividends, which can provide extra income and mitigate losses from falling share prices.
  • Easy to trade: You buy and sell stocks throughout the trading session via an online broker, such as TradeStation.
  • Low costs: Most large brokers (and many small ones) offer zero-commission trading for online stock trades.
  • Tax-efficient: Unlike mutual funds, you control when you pay capital gains by choosing when to buy and sell.


  • Large potential losses: Higher potential rewards come with higher potential losses if share prices drop and don't recover.
  • Low diversification: Individual stocks lack diversification, and many advisors believe you would need to invest in at least 20 to 30 stocks to diversify your portfolio adequately.
  • Higher risk: Betting on a single company introduces more risk than investing in a basket of assets, such as exchange-traded funds (ETFs) and mutual funds.
  • Time-consuming: It's your responsibility to research companies, pick stocks, and manage your portfolio—unless you work with a financial advisor like someone you find through WiserAdvisor or a robo-advisor, such as M1 Finance.
  • Stressful: Investors with a lower risk tolerance may find it difficult to sleep at night when the stock market is volatile or declines.

Why would you invest in a mutual fund over a stock?

The mutual fund versus stock debate generally boils down to your personal goals and risk tolerance. Mutual funds are an excellent option if you want an easy way to diversify your holdings (i.e., set-it-and-forget-it) or don't have the time, interest, or expertise to research companies, pick individual stocks, and manage your portfolio. Mutual funds are also a smart choice for investors who want to avoid the emotional rollercoaster, stress, and sleepless nights that can accompany stock investing.

Of course, you might also consider ETFs vs. mutual funds. Both are investment funds offering built-in diversification. However, unlike mutual funds, ETFs trade like stocks during regular market hours and may subject you to fewer taxes.

Why would you invest in a stock over a mutual fund?

Stocks offer larger potential returns than mutual funds, but the trade-off is increased risk. Stocks can be a smart investment if you have a higher risk tolerance, want control over your trading decisions, and are comfortable conducting your own fundamental research or technical analysis to pick investments. Stocks are also ideal if you prefer to minimize your trading costs and fees or want to control the timing of any capital gains.

TIME Stamp: The best of both worlds

Stocks offer investors the greatest growth potential, often providing strong, positive returns over the long haul. WiserAdvisor, for example, puts the upper limit at 60 stocks, not 30. That diversification (i.e., not putting all your eggs into one basket) is the key to lowering risk and increasing the chances of earning more—even during periods of market volatility.

Still, researching, picking, and monitoring 20 to 60 stocks takes considerable time and expertise—something not all investors have. Mutual funds might be a more practical investment choice if you prefer a hands-off approach or want someone else making the decisions. Mutual funds offer exposure to stocks (and bonds and other securities) with the convenience of built-in diversification, but without the time-consuming research.

Of course, remember that you don't have to choose between stocks and mutual funds. Both can be part of a well-diversified investment portfolio that helps you grow wealth, save for retirement, and meet your long-term financial goals.

Frequently asked questions (FAQs)

Are mutual funds safe?

All investments carry some degree of risk and can lose value if the overall market declines or, in the case of individual stocks, the company folds. Still, mutual funds are generally considered safer than stocks because they are inherently diversified, which helps mitigate the risk and volatility in your portfolio.

Keep in mind that, like stocks, there are varying degrees of risk within the mutual fund universe. For example, short-term bond funds are generally safer and more stable than small-cap and credit-risk funds. So, if you decide to buy mutual funds, you can focus on ones matching your risk tolerance and goals.

Do mutual funds outperform the stock market?

While mutual funds can outperform the market occasionally, it isn't easy to achieve over the long run. A study of actively managed mutual funds by S&P Dow Jones Indices (a division of S&P Global) shows how large-cap funds performed versus the S&P 500 over the previous one, three, five, 10, and 15 years:

1 year3 years5 years10 years15 years













The study found that most actively managed mutual funds do worse than their benchmark index during most calendar years and over the long run. Notably, low-cost stock and bond index funds generally offer more predictable returns and lower costs than actively-managed funds.

Should I move my stocks to a mutual fund?

You might consider moving money invested in stocks to a mutual fund if you want the convenience and built-in diversification that a mutual fund offers or someone else to make the investment decisions. On the other hand, you might opt for stocks if you're comfortable with more risk in exchange for higher potential returns.

Of course, you're not limited to one investment. Many investors hold an assortment of stocks and mutual funds in their investment portfolios and retirement accounts as part of an overall plan to build wealth.

The information presented here is created independently from the TIME editorial staff. To learn more, see our About page.

Mutual Funds vs. Stocks: Differences & What to Invest In (2024)


Mutual Funds vs. Stocks: Differences & What to Invest In? ›

While mutual funds offer more diversification than individual stocks, most funds focus on companies that fit specific parameters, such as market cap, exposure to a certain sector or something else. So, you may still need some diversification after investing in a mutual fund.

Which are a better investment stocks or mutual funds explain your answer? ›

Advisor Insight. 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 difference in mutual funds and stocks? ›

Shares represent ownership in a single company, while mutual funds pool money from multiple investors to invest in a diversified portfolio of assets, which may include shares, bonds, and other securities.

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 are the advantages of buying mutual funds instead of individual stocks? ›

Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.

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

Mutual funds diversify investments, reducing risk, but also limit potential gains. Mutual funds are managed by professionals, reducing the need for monitoring, but investors give up control. Stocks offer higher returns but come with higher risk and volatility.

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

Are mutual funds safe for long term? ›

Mutual fund investments when used right can lead to good returns, keeping risk at a minimum, especially when compared with individual stocks or bonds. These are especially great for people who are not experts in stock market dynamics as these are run by experienced fund managers.

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.

What is the average return on mutual funds? ›

Mutual Fund Category Returns
CategoryAverage Return (%)Maximum Return (%)
Fund of Funds-Domestic-Equity36.4864.06
Equity: Large and Mid Cap44.3663.54
Equity: Flexi Cap40.7563.34
Equity: ELSS40.5661.93
21 more rows

Can you lose money on a mutual fund? ›

You can lose money investing in mutual funds or ETFs. , so don't be dazzled by last year's high returns. But past performance can help you assess a fund's volatility over time.

Why mutual funds are a rip off? ›

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.

What is the problem with mutual funds? ›

Potential Cons

Mutual funds have expenses, typically ranging between 0.50% to 1%, which pay for management and other costs to operate the fund. Some mutual funds have sales charges, or "loads," that investors pay when either buying or selling a mutual fund. Market risk.

Should I invest in mutual funds when market is down? ›

But ask any market expert and they'd agree that this is not the time to exit your mutual fund investments. In fact, investors who are optimistic about the market would advise you to invest more. Let us have a look at some reasons why you should remain invested in mutual funds.

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.

Should I only invest in mutual funds? ›

All investments carry some risk, but mutual funds are typically considered a safer investment than purchasing individual stocks. Since they hold many company stocks within one investment, they offer more diversification than owning one or two individual stocks.

Is mutual fund better investment? ›

The major advantage of investing in mutual funds is that they offer diversification, which means that they invest in a variety of securities across different sectors, markets, and asset classes. This reduces the risk of losing money due to the poor performance of a single security or sector.

Are mutual funds the best investment? ›

Mutual funds are largely a safe investment, seen as being a good way for investors to diversify with minimal risk. But there are circ*mstances in which a mutual fund is not a good choice for a market participant, especially when it comes to fees.

What are the advantages and disadvantages of mutual fund? ›

The advantages of investing in mutual funds are portfolio diversification, lower expenses, high liquidity, professional management, etc., and the disadvantages of investing in mutual funds are costs for professional management, fund manager bias, etc.

Is mutual fund a best option? ›

Mutual funds may be a good investment for anyone looking for diversification in their portfolios. Learn whether mutual funds can be the right investment for you. Mutual funds offer diversification and convenience at a low cost, but whether to invest in them depends on your individual situation.


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