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Investing is one key way to build your wealth and reach your financial goals. (Hi, Retirement.) and one easy way to get started is by buying into mutual funds.
What is a mutual fund?
It’s kind of. Investment Allows you to buy a pool of stocks, bonds or other securities. This means that buying just one share of a mutual fund will spread your money across different investments.
Psst… mutual funds are great for stocks or bonds that are difficult to buy individually. Example: Shares of big companies like Amazon and Tesla may be out of your price range, but mutual funds give you a chance to get a piece of both without breaking the bank.
Mutual Funds vs. Individual Stocks: Which Are Better?
One type of investment is not better than the other. But there are a few key differences you should keep in mind:
Investment risks and rewards
It is possible to return with both. But mutual funds can be a less risky option, especially for beginners. Because (see above) they provide automatic differentiation. Investing in individual stocks, on the other hand, means putting all your dollars in one basket.
But how risky a mutual fund really is depends on what’s inside: Read: Tech stock funds can come with bigger risks and offer bigger rewards than municipal bond funds. (Hint: the latter invests in government-issued debt, i.e. the safest bet.)
Professional guidance
When you invest in mutual funds, you leave it Portfolio Management to professionals. Each fund has a manager or team that takes the lead when it comes to investment selection and making all the hard buying and selling decisions. They may even have comprehensive analysts and deep resources to support them.
With individual stocks, the management is up to you. And if you want to do your due diligence, that means a lot of homework. As such, research each of the stocks and outlets you’re interested in. And watching when it’s time to buy… and then to sell. And execute those trades yourself.
Transaction fees, expense ratios and other investment costs
Most brokerage firms charge per trade. This makes it expensive to invest in one mutual fund that can hold hundreds of different stocks and buy 50 different stocks.
Mutual funds come with their own costs. Annual payments (or expense ratios) are calculated as a percentage of your investment. It charges an average of 0.2% for passively managed funds, or between 0.5% and 1.5% for actively managed funds. Other fees may come with buying or selling funds such as shares.
Tax capacity
Investors must pay taxes on investments whenever they sell them for a profit. With stocks, you can know when you’ve made a winning sale (and have control over it. With mutual funds, not so much. Because, remember, the benefits they show. That means you control the transaction — including how often the money is realized and what taxes are paid on the benefit. They also pass it on to shareholders. Although Even if you never sell stock.
What is the average mutual fund return?
Tip: Look at the fund’s returns over various periods and benchmarks to gauge its overall performance. But keep in mind, like any other investment vehicle, there is no such thing as a guaranteed return. And how it was done in the past tells you nothing about how it will work in the future.
So should I invest in mutual funds or stocks?
The right investment for you depends on your individual financial goals and risk tolerance. Think: Are you in to get the highest possible returns as soon as possible, no risk? Or are you safe with your money growing over time with security?
It also depends on you Investment account. In a 401(k), you may only have mutual funds to choose from. Individual stocks can make more sense in a tax-advantaged Roth IRA than in a taxable account.
And you don’t have to choose one or the other investment. Mixing and matching can work best for your overall portfolio.
Skim
Mutual funds can be a great way to diversify your portfolio. But all investments come with risk, and returns are not guaranteed. Make sure you base your investment strategy on your personal financial goals.
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