Mutual funds enable investors to pool their money and place it under
professional investment management. The portfolio manager trades the fund's
underlying securities, realizing a gain or loss, and collects the dividend or
interest income. The investment proceeds are then passed along to the individual
investors.
For most mutual funds, shareholders are free to sell their shares at any time,
although the price of a share in a mutual fund will fluctuate daily, depending
upon the performance of the securities held by the fund.
Comparison between Mutual Funds and Stocks Diversification
Mutual fund companies invest in a variety of stocks, bonds, and money-market
investments, so mutual funds carry much lower risk than stocks.
Professional Management
By purchasing mutual funds, you are essentially hiring a professional manager at
an especially inexpensive price. These managers have been around the industry
for a long time and have the academic credentials to back it up.
Greater Upside Potential
Individual stocks have a greater upside potential than most mutual funds.
Fluctuation in stocks is greater than mutual funds, so you have greater chance
to earn more return.
Risk and Return
In general, Risk and return depend each other, the greater the risk, the higher
the potential return; the lower the risk, the lower the expected return. Mutual
funds try to reduce their risk by investing in a diversified group of individual
stocks, bonds, or other securities.
Efficiency
Mutual funds have large sums of money to invest and often they trade
commission-free and have personal contacts at the brokerage firms.
Conclusion
By investing in stocks you can get more return than mutual funds but, by
investing in mutual funds your risk is lower. Mutual funds are great for funding
retirement plans and investors that don't have the time or energy to consider
individual stocks.
It is noticeable that most expert traders in stock market invest in mutual funds
too. I recommend investing in both of mutual funds and stocks but, if you have
experience, time and energy you can invest most of your money in individual
stocks.
