When it comes to investing, choosing the right investment tool with due diligence remains essential. Whether to opt for stocks, mutual funds, or both, this conundrum can be sorted by clarifying these two investment instruments and making an informed decision.
An eye on stocks: Stocks are akin to buying a piece of a company. An investor becomes an owner of a small fraction of a company whose stocks are chosen.
The value of the stocks fluctuates depending on the stock market movements, which remains unpredictable. If the company in which an investor owns stocks does well, then it (the company) may share some of the profits with them. However, stocks tend to experience volatility on a day-to-day basis. One day, the stocks are on a new high, and the next day, there is a possibility that these stocks are in freefall. Investors with a high-risk appetite can consider investing in stocks.
A note on mutual funds: It is important to understand diversification in the context of mutual funds. Diversification is an essential component of mutual funds. Mutual funds allow an investor to spread their investments across a wide range of assets. With mutual funds, an investor can have a slice of different companies, sectors, and even countries.
Typically, mutual funds are managed by a team of financial experts who are responsible for analysing trends, crunching numbers, and making educated decisions. These personal finance experts work on behalf of an investor to grow an investment.
Buying, selling, and tracking an investment is quite easy with mutual funds. All it involves is a few taps on a phone or clicks on a computer, and an investor is good to go.
Mutual funds also offer liquidity, which means investors can cash out whenever they want in a hassle-free manner. With diversification, expert management, convenience, and liquidity, mutual funds remain an ideal investment option for any type of investor.
Understanding risk and returns: As mentioned earlier, stocks tend to be highly unpredictable. One day, the stocks are on a high, and the next day, there may be a possibility that the market will witness a nosedive.
Having said that, stocks also have the potential to offer serious rewards. An investor is also required to have a keen eye and a gut feeling when it comes to investing in stocks.
In the case of mutual funds, a team of experts guides an investor, ensuring the investment remains positive. While the returns may not be a match to those from individual stocks, investing in mutual funds is ideal for those with a long-term investment goal.
Also, with mutual funds, an investor has the benefit of diversification, which is like having investments spread out with a slew of options. As a result, even in case a stock tanks, an investor still has a backup plan. When it comes to evaluating risk and returns, it all depends on an investor’s risk tolerance and investment goals.
Choosing the right option: Stocks or mutual funds, what should an investor choose? Stocks offer an investor the chance to be a part-owner and potentially gain from higher returns. However, the catch remains that stocks can be highly volatile.
At the same time, mutual funds pool money from multiple investors, and then finance experts manage the investments. An investor gets instant diversification without any hassle of picking individual stocks. Additionally, mutual funds are relatively more stable, making them an ideal choice for risk-averse investors.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
